Wednesday, July 16, 2014

What are nonprofits for?

What are nonprofits for?

This seems like a question that used to have an easy answer - they are tax-exempt organizations that provide services, from education to art to meals; they offer a place for ideological, ethnic or other minority groups to express their ideas and serve their communities; they offer complements or alternatives to services provided by the government; and they advocate for change.

While it never really was all that clear cut I think there was a general sense among Americans at least that, within the U.S., you knew a nonprofit when you saw one.

Well, if it was clear once, it's not clear now. And there are challenges to the notion of "nonprofits do X" coming from many directions. Here are a few headlines that show this:

"For-profit health clubs challenge nonprofit YMCA's tax exempt status "
        The Nonprofit Quarterly, July 15, 2014
         Boing Boing, July 2, 2014

In both cases above the challenge comes because of who the organizations serve - in the YMCA case the membership is very similar to those folks who join commercial gyms, so why does one get tax privileges over the other. The argument raised in the case against free software is that such a resource might be used by commercial enterprises - so where's the public benefit?

The nature of these challenges focuses on who might be benefitting from the services, not whether the services themselves are a public benefit. This is ironic from a nonprofit standpoint. For decades nonprofit managers and funders have been trying to build sustainable revenue sources for nonprofit organizations so they can survive. So much so, the Red Cross recently argued that its spending practices are trade secrets! BUT, at least in the logic of the two headlines above, if the organizations might serve those who can pay (one source of sustaining revenue) then they may not be nonprofit.

As if the market-based challenges to nonprofits weren't confusing enough, in the U.S.A. there's the growing challenge of political action within the nonprofit frame. I'm in the middle of reading Ken Vogel's Big Money about campaign finance post-Citizens United. He has evidence aplenty of the deliberate weaving of 501c4s (nonprofits which provide donor anonymity) into the mix of enterprise networks being built to raise independent cash for campaign politics. And then, along comes this study, showing us what we all suspected, the IRS can't (and possibly shouldn't be) regulate these organizations - "Hobbled IRS can't stem dark money flow," Center for Public Integrity, July 15, 2014.

Of course, given recent rulings on corporate rights as religious enterprises (pdf), the movement to build socially responsible businesses,  and the shenanigans of big companies "inverting" to save taxes, it's no longer really clear what a company is either.

In a story on the compensation of a nonprofit hospital director, Senator Charles Grassley is quoted in today's New York Times as saying, "major nonprofit hospitals often are indistinguishable from for-profit hospitals in their operations.”

Clearly there's lots of change afoot in the corporate code and practices - from the commercial space, political realm, and within the independent sector.  If it's getting so hard to distinguish these enterprises, shouldn't we be asking "What about the distinction matters?" That way we can focus our attention (and regulation, oversight and incentives) on the real reasons we have separate sectors of commerce, government and civil society - not the special interests that have grown up around and within each of them.


PST said...

Senator Grassley's quote reflects what I see as a disturbing trend: as local and state governments become increasingly strapped for money, whether that be because of overspending, decreased revenue from the Great Recession, or taxes being cut, they are setting their sites on tax-exempt organizations and questioning their tax-exempt status. This is often done without an understanding of what the term "nonprofit" means, and what it encompasses. There is a sense in the general public that nonprofit means "doesn't make a profit," not "doesn't distribute profits to its owners." There is also a misunderstanding about what is charitable. This comes at the same time that many in the government want to cut government aid to the poor, with the expectation that the charitable sector can more efficiently replace the government.

Bradford Smith said...

Great and timely post Lucy, and an excellent comment by PST. To my mind the major difference is the use of whatever surplus income-generating activities might produce to provide free or subsidized goods and services. In a for-profit, profits would accrue to the owners/shareholders. If a nonprofit cannot demonstrate how it is serving a charitable or public benefit purpose it is fair to question whether the tax benefit constitutes unfair competition with for-profit businesses (the health club example) Beyond that, nonprofit is not hyphenated while for-profit is!

Pete Manzo said...

Great question! I agree with your suggestion that to answer the question “What are nonprofits for?,” we should start by asking what matters about the distintion between a nonprofit, a for-profit, and presumably government.
Much smarter people than me have written books on the question, but I think one key aspect of the essence of “nonprofitness” is that they are vehicles for people to voluntarily work together to express their values or beliefs (people should not be enslaved, women and girls should have the vote and access to education, people should not go hungry, people deserve medical care). (Referring here to public charities, not necessarily to private foundations – which could be a solo expression of values or belief – and not the other 20+ types of tax-exempt orgs (I am a recovering attorney with maybe too much experience in nonprofit law). Their “nonprofitness” is more than any one thing they do (yes, the YMCA offers gym memberships, but it also ….), or who benefits (the IRS decision about open-source seems myopic), or how their leaders are paid, and more than how they are bound to use surplus revenues (we expect government to look after the common good, even as we know democratic and bureaucratic decisionmaking are distorted). Nonprofits are born in people coming together to solve problems or meet a need that people feel or believe must be addressed, and must be addressed collaboratively or in concert, and the faith people put into each other through nonprofits is at the root of many expectations we have of them, that they don’t pay their leaders too well, that they put peoples’ needs above their ability to pay, and so on. Perhaps the two dominant theses for the existence of nonprofits are “market failure” theory and “government failure” theory – like the name “nonprofit,” these theories are negative, they define a “non-elephant”). But even even if we imagine perfectly efficient markets and perfectly effective and efficient governments, I think we still would need nonprofits to fill this voluntary function, the coming together of people to express the way they would wish the world to be, or themselves or their community to be. (Jan Masaoka at CalNonprofits is one of the strongest proponent of this point of view, she deserves any credit in this comments, and faults are mine alone.)