‘Nonprofits’ face risks, opportunities in new era of smaller government

If you contribute to your church or synagogue, the arts, charities to help the poor, civic or environmental groups, dear old alma mater or any number of public causes, you are supporting the so-called “independent” sector of society. Because more people are doing the same, that sector is growing faster than either government or business.

Hundreds of thousands of new jobs have been created in the charity field, fueled by an $8 trillion to $10 trillion inter-generational transfer of wealth taking place over a couple of decades. The future of philanthropy and nonprofit organizations should look bright.

But if you talk to donor groups or nonprofit organization, you may encounter more concern than celebration. Some see government threatening their freedom by challenging the tax-free status of many charities and by cutting off federal funds for groups thought to “lobby” too much. Others see a cost-cutting government dumping its load of unresolved social troubles onto the inadequate shoulders of private philanthropies. Some worry, further, that if tax rates are cut in the next Congress, the diminished advantages of tax deductions will reduce private giving.

Imagine that you headed a foundation or a nonprofit group and thought that all of these things were happening at once. Fortunately, they’re not. The period ahead will be one of unprecedented challenge to the nonprofit world, but it also could become a golden age. It all depends on whether the people who run foundations and the people who spend their money take the challenge seriously–and adapt.

The effects of tax cuts on charities is the easiest issue to handle. At a recent conference of the Pacific Northwest Grantmakers Forum, Leslie Lenkowsky of the Indianapolis-based Hudson Institute displayed a chart on the effects tax rates have on private giving. during the ’70s, when the federal tax rate was hight, he notes, total donations stagnated. When the top rates were cut in the ’80s, giving increased, and it continued to grow until the tax increases of the ’90s (Bush and Clinton), when it slowed once more.

The simple explanation, as Steve Forbes has said, is that people tend to give more when they have more. In any case, it can be shown that the prospect of a tax deduction is not the decisive factor in a charitable decision.

It is tougher to calm the fear of legal threats that government poses to nonprofits. It really is not fair to say that government–whether Congress or the IRS–is behaving irresponsibly, so far. Tax-deductible status is supposed to be conferred on groups that are genuinely charitable or educational in their purpose. That requirement should be broadly interpreted, but there have to be limits. As some organizations try to stretch those limits, there’s bound to be backlash.

Let’s say I believe in the cultural and educational value of good Hungarian cooking and am sad that so few of my countrymen are exposed to it. Perhaps I should start a nonprofit, tax-exempt restaurant that offers the best in goulash, all at reduced prices. I get lots of customers–and the restaurant down the street, that does pay taxes, goes out of business. The gain in goulash appreciation is notable, but so is loss to the public budget. Eventually, tax rates for other people have to go up, while I continue to prosper, untaxed.

Unfortunately, this is not a crazy example. An undetermined part of the booming tax-exempt nonprofit field is made up of entrepreneurial opportunists who believe that their enterprise can survive better if it is not technically a business, but a merely nominal “nonprofit.” Thus, the curiosity of the IRS sometimes is warranted.

The same goes for Congress’ interest in “lobbying.” A certain amount, apparently, is tolerated, on the wise understanding that the line between petitioning your elected officials and lobbying is easily blurred. You do not want the government censuring organizations whose natural educational efforts lead to efforts to improve the way government does its business. But you also don’t want political organizations disguising themselves as tax-exempt nonprofits and getting an advantage on their natural competitors.

The final challenge to philanthropy is to respond creatively to the government’s shedding of some social programs. The title of the recent Grantmakers Forum conference was “Politics Not as Usual” to acknowledge that government is now so overcommitted that it simply has to cut back. That applies to whatever party wins November’s election.

Of course, the nonprofit sector cannot begin to replace all the programs government is reducing; nor should it. Many of them don’t work well anyway. The chance beckons, instead, to find private programs that satisfy public needs better. Private charity is often more efficient and usually has a humane spirit found lacking in vast government agencies. The current issue of Philanthropy magazine describes many examples–from tutoring in the inner city to rehabilitation of felons to community development.

But the truth is that the nonprofit sector can become bureaucratized, too, as a visit to some of the nation’s largest foundations will attest. And it can become as adroit at conditioning its programs to the availability of government money as government agencies themselves. And–let someone say it–there are some government agencies whose spirit of service is higher and nobler than those of the more cynical nonprofit enterprises.

So, the great dangers facing the nonprofit world also pose its opportunity. Go back to being a truly “independent” secure, and grow from strength to strength.