Mandating tax payments from nonprofits is a bad idea
The nonprofit ecosystem plays a vital role in strengthening the Commonwealth
A recent op-ed in CommonWealth focused on a bill at the State House that would give municipalities the ability to require payments to cities and towns by nonprofits that are currently exempt from property taxes. That would be a harmful—and unwarranted—change to the state’s nonprofit ecosystem.
Many know the work of nonprofits, but few are aware of the legal infrastructure which makes it possible. Let’s talk first about the work.
Massachusetts has one of the largest nonprofit sectors in the country. That’s a credit to the state, and it speaks to our collective idealism. Each day small, medium, and large nonprofits work to meet critical needs, help people grow, and build stronger communities. People from every type of background rely on nonprofits.
During the pandemic, nonprofits raised their work to new heights as needs skyrocketed. Many took on new initiatives – after school programs became food distribution centers, and food banks became vaccine distributors, to name just two. Nonprofits were stretched financially, organizationally and emotionally, and they came through in unprecedented times.
The covenant begins with the legally-binding pledge every nonprofit makes to serve the public interest by pursuing its charitable mission. Nonprofits don’t just aspire to serve the public interest; they’re required to do so from the day the government approves their nonprofit status. That comes with strict requirements governing nonprofits’ use of assets, protection of donated funds, and dedication to the public interest.
Nonprofits are also subject to extensive oversight. Every nonprofit must submit detailed IRS filings on finances, governance, and operating practices each year, with additional filings required at the state level. Those are publicly accessible—a level of disclosure and transparency that goes far beyond what’s required of private companies.
Because they serve the public interest, nonprofits are afforded tax-exempt status. Nonprofit budgets are built on private donations and often government grants. Tax-exempt status enables nonprofits to dedicate all of those funds to their charitable missions. If they don’t, their tax-exempt status can be revoked. Each year nonprofit leaders sign legally-binding documents attesting to their organizations’ compliance with nonprofit laws.
The bill filed at the State House would upend this system by enabling municipalities to force larger nonprofits to pay taxes, ending their tax-exempt status. If that status was broken, the door would be open to any type of tax requirement for nonprofits.
New tax requirements would reduce the amount of funding available to nonprofits to do their work. Most nonprofits – be they large, medium, or small –operate on thin margins, so less funding would mean fewer services. Those margins are being pressured by inflation, and they will be wiped out if we have a recession. A recession would curtail all four major nonprofit revenue streams – individual donations, government funding, foundation grants, and earned revenue.
New tax requirements would also reduce the ability to innovate and grow for every nonprofit subjected to them. That innovation isn’t just a buzz word. In many parts of the nonprofit sector, including health care, social services, education, and housing, innovation saves people’s lives and transforms communities.To preserve the nonprofit sector’s capacity to innovate, and its financial base, we need to sustain its legal foundation. We should preserve each part of that foundation–the legally-binding requirement that nonprofits pursue their charitable missions exclusively, the restrictions on their activities, the oversight and disclosure they are subjected to, and the tax-exempt status which enables them to devote the maximum amount of revenue to the delivery of services.
Jim Klocke is the CEO of the Massachusetts Nonprofit Network, a statewide organization that works with 600+ member organizations across Massachusetts to strengthen the nonprofit sector through advocacy, capacity-building, and communications work.