As long as there have been taxes, governments have been able to influence giving and nonprofit activity by the ways in which they have levied, or not levied, imposts on donor, dona- tion or donee. The power of taxation has been.used at times in other lands to undermine nonprofit institutions and associ- ations. But the predominant pattern throughout American his- tory has been one of growing governmental encouragement of private giving and nonprofit organization through the tax laws.
The Spread of Nontaxation
(This encouragement has developed in the United States pri- marily through a broadening and deepening of immunities from taxation. Such immunities reflect ian underlying quid pro quo—the belief that society is well compensated for tax rev- enues foregone because the activities and services thereby aided and encouraged are of benefit. to society. A frequently cited justification for tax immunities that affect nonprofit organiza- tions is that government, in fact, would itself have to supply many of the services, fill many of the functions, of such organi- zations if they did not exist.
Exemption from property taxes is one of the principal im- munities enjoyed by nonprofit organizations and also one of the oldest. Following English precedents, such exemptions have been accorded in America to religious and educational organi- zations since colonial days. Secular charitable institutions ex- panded in number and generally became exempt from proper- ty taxes in the nineteenth century. Today, every state has some form of property tax exemption for nonprofit organizations, and exempt private nonprofit property encompasses no less
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than one ninth of all property in the United States, it is esti- mated, and accounts for some $5 billion a year in unlevied tax revenues.
Religious, educational, charitable and scientific organiza- tions have been exempt from federal income taxes, too, ever since today's basic income tax law was enacted in 1913. Cer- tain kinds of nonprofit organizations are exempt from certain other federal taxes as well. Nonprofit educational organizations do not have to pay excise taxes on purchases of items for their exclusive use. Nonprofit hospitals and some nonprofit educa- tional organizations are exempt from federal taxes on tele- phone services. Charitable "drawings'* are exempt from the 10 per cent federal tax on wagers.
But possibly the single largest tax immunity benefiting the nonprofit sector is a provision of the federal tax laws that applies not to nonprofit organizations directly but to those who give to eligible nonprofit groups and institutions—the "charita- ble deduction" from personal income taxes. Under this provi- sion, the taxpayer can subtract a "charitable" donation from his or her income before calculating the tax to be paid. Like the tax exemption, the tax deduction has expanded in scope over the years. Only 15 per cent of a person's income was deductible when the charitable deduction was enacted in 1917.
This was increased to 20 per cent in 1952, to 30 per cent for certain types of nonprofit organizations in 1954, to 50 per cent for more kinds in 1969. In; 1974, approximately 30 million people used the charitable deduction, thereby reducing the amount of federal income taxes they otherwise would have paid by around $4 billion and, as Commission studies referred to later in this report indicate, increasing their giving to non- profit organizations by at least as much.
The long-range trend, in other words, has been one of gener- al expansion of tax immunity for the sake of nonprofit activity.
A study of tax laws in other countries indicates that such immunity has become of far greater significance in size and scope in the United States than in any other nation. So deeply rooted is this practice in American ways, in fact, that it would appear to enjoy almost constitutional status in many Ameri- cans* eyes. (Nontaxation of religious organizations is held by
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some legal authorities to be literally prescribed by the Consti- tution under the 1st Amendment prohibition against laws "re- specting an establishment of religion.")
Gountermovements
These are times, however, as this report notes elsewhere, in which many institutions and institutional arrangements in bur society are being reexamined, and the degree and pattern of nontaxation of charitable organizations and of philanthropic giving is clearly among them. Indeed, nontaxation serves] as a convenient, concrete focus for social concerns that have prob- ably, always been a counterpoint to the admiration and praise directed at philanthropic giving; nontaxation serves as a focus in particular for a frequently evidenced wariness about the relationship of private giving to personal and institutional wealth and power, a wariness that may well be growing in this day, of heightened social sensitivities and broadening egalitar- ian sentiments.
In any case, there have been a number of signs in recent years that tax immunities benefiting nonprofit organizations may no longer be generally considered above questioning.
Among the signs is the fact that a number of communities in the past decade have attempted to exact property taxes or
"voluntary" payments in lieu of taxes from exempt organiza- tions that iise public services but have not had to pay for them.
Mounting property tax rates to meet straining municipal bud- gets have been a major impetus to such challenges to the prop- erty tax exemption. "As is true with any tax source," a Com- mission report on tax exemption bluntly puts it, "the higher the rate the more difficult to grant a free ride . . . "
There has been greater scrutiny of the income of tax-exempt organizations, too, in recent years; income that flows from en- terprises that are run by, but are not directly related to the purposes of, tax-exempt entities is now subject to taxation. At the federal level, the four per cent "auditing fee" tax on foun- dation income that was enacted in 1969 is viewed by some mainly as reflecting Congress's unhappiness with,foundations, but others glimpse a much broader implication, a precedent.
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