Yes, I was wrong.
In my recent article titled, “Taxes, Churches and Government,”[i] I argued that churches should not be granted tax-exempt status like secular charities because most of their activities were not charity-related.
Several people posted comments pointing out that tax exempt status was not limited to charities. “Advocacy groups” like the NRA and ACLU can also qualify. Churches are clearly advocacy organizations. They advocate their religious beliefs, including belief in a supernatural deity that performs all kinds of miracles, opposition to women’s rights and a lot more. Like the NRA and ACLU, religious organizations use the media to spread their beliefs throughout the populace, and through litigation and lobbying. So equating churches to charities was wrong. As advocacy groups, they are just as entitled to 501(c)(3) status as any of the secular advocacy groups.
One of the contributors to the comment thread, C Peterson, threw a rope down in the hole I had dug for myself (as he often does) to help me climb out. More on that later.
Tax exemptions are a form of subsidy, reducing the cost of operation for a business. Subsidies are a legitimate method of incentivizing actions that government deems to be in the public interest. Who in government decides what business activity is in the public interest? Well, in our democratic republic, our representatives do.[ii] Direct subsidies are enacted by Congress or state legislature or city council…whatever level of government has jurisdiction, after open debate and discussion. They are usually temporary, and must be renewed periodically or allowed to expire. Tax exemptions, on the other hand, are almost always permanent, a silent drain on government coffers that continues indefinitely.
First, let’s talk about charities. Company Q performs certain charitable services that would otherwise need to be provided by government. So, government grants a tax exemption to company Q. It also grants tax deductions to individuals who donate money to Company Q. The result is that government tax revenue is reduced, but the cost of those services is no longer a government expense. Is this a good cost-effective deal for taxpayers? HAHA! NO! Government has no real control over exactly what services will be provided by company Q, so it is not known how much they would have cost government. In fact, company Q has no legal requirement to provide any specific services, so the services they provide might not meet some urgent needs that government would assign a higher priority. Government is, in effect giving Company Q a blank check in the form of reduced tax revenue from both tax exemptions and the tax deductions on donations in return for…what?
Consider the alternative: Instead of granting tax exemptions and deductions, government awards a contract, through a process of competitive bids, to provide specific services. What is the difference? Now, government can determine exactly what services are to be provided, and the cost of those services is known. Isn’t that a better way to spend tax dollars? Yes, those tax exemptions and deductions that reduce government revenue are equivalent to tax dollars spent. In fact, they are referred to as “tax expenditures” in calculating government budgets.Now think about advocacy groups.
Why does our government grant special privileges to advocacy groups? Those groups clearly have free speech rights to disseminate their agenda. Nobody is stopping them from lobbying and litigating as much as they like.[iii] But why should the government get involved in that? What essential functions do such organizations provide that would otherwise need to be provided by government? Advocacy of religious belief, environmentalism, civil liberties, gun ownership and any number of other social issues is a normal part of a democracy. There is no reason why government should encourage these activities by granting tax exemptions. Nor is there any reason to encourage citizens to contribute to advocacy groups by making those contributions tax deductible.
One commenter, C Peterson, took it one step further:
“I remain in favor of removing the concept of a nonprofit entity from our tax law completely.”
I think he is correct. The whole idea that any organization, religious or secular, deserves any special privileges is nonsense. Why aren’t all those right-wing government haters demanding that government “get out of the way” and stop meddling in the business of these organizations?[iv]
Thanks for that rope, Chris.
[ii] Tax exemption decisions are usually delegated to taxing authorities like the IRS. The heads of those government agencies are appointed by elected officials. They establish rules that companies must obey in order to qualify.
[iii] There are some restrictions. “All charities…are absolutely prohibited from intervening in a political campaign for or against any candidate for an elective public office. If a charity does intervene in a political campaign, it will lose both its tax-exempt status and its eligibility to receive tax-deductible charitable contributions.” – Source: IRS instructions for Schedule A, IRS Form 990. There is more, and it gets complex and somewhat vague: “Organizations with substantial political or lobbying objectives may be recognized as tax-exempt under Code Section 501(c)(4). The rules that apply to 501(c(4) organizations are different from those that pertain to 501(c)(3)s, and permit 501(c)(4) tax-exempt organizations to engage in substantial lobbying, as long as it is “germane” to the organization’s program, among other limitations.
[iv] A rhetorical question. Principles go out the window when getting freebies from government is involved.