James Bond was known for preferring his martinis “shaken, not stirred.”
Stephanie Strom’s article in Monday’s Times on states’ pursuits of taxes on presumed tax-exempt organizations raises important questions about when things blur, rather than blend (or get shaken rather than stirred).
1. Here is the NYT article, “Tax Exemptions of Charities Raise New Challenges.” It looks into a few cases of nonprofit organizations where the fee structure raised eyebrows at state regulators’ offices. There are three key issues, according to the piece:
“One issue is the growing confusion over what constitutes a charity at a time when nonprofit groups look more like businesses, charging fees and selling products and services to raise money, and state and local governments are under financial pressure because of lower tax revenues. And there are others: Does a nonprofit hospital give enough charity care to earn a tax exemption? Is a wealthy university providing enough financial aid?”
The last two issues have been the objects of considerable scrutiny lately—as well as an op-ed in Sunday’s edition of the Times. The broad questions raised by the piece are at the very crux of my professional interests—what is public, what is private, and who decides?
2. The second force mentioned in the article, the budget pressures on state and local governments, is a time-honored source of pressure on nonprofit regulators and tax systems. I’ve written frequently about the relationships between public budget pressures and the regulatory infrastructure for nonprofits and foundations.
3. The issues raised in the article are critical. Viewed more broadly than the few instances examined in the Times, the questions are:
- What is a public good?
- Are public goods and those who provide them deserving of special exemption and recognition? When?
- Who should provide these goods?
- How should these providers be structured?
- How do we support and provide the right incentives for a sustainable mix of “public good” providers?
These issues are not unique to our times—debates and decisions about these very questions are why we have the tax structures and regulatory systems we have. However, they must be understood in today’s context, which includes the rise in corporate social responsibility, social entrepreneurship, social ventures, and new governance structures for hybrid organizations—B Corporations and L3Cs, in particular.
Unrealistic expectations of sustainable revenue sources for nonprofits or discussions of funders’ exit strategies undervalue and push essential organizations (that are not paid for by market mechanisms) further toward the margins. Simultaneously, espying a devil in all earned revenue sources leaves critical service providers vulnerable to forces that are beyond their control and that work at fundamentally cross purposes (witness the relationships between falling support for food banks, while the need for their services increases).
The social enterprise movement, philanthropy, and social venture businesses share a wide array of interrelated beliefs:
- Communities need a diversity of public goods providers
- Businesses have many public responsibilities
- Market forces can be harnessed for public good—though this requires deliberate structure and attention and should not be assumed
- Public good providers need sustainable sources of funding
- Governments alone cannot be the sole providers of public goods.
There are other premises, and more eloquent articulations of them. However, I don’t believe I’ve ever heard anyone participating in these discussions make a (serious) claim that we don’t need independent civil society institutions, nor that social ventures can, will, or should provide all public goods. When the discussions devolve into an “either/or” approach, I tend to tune out. Civil society organizations, “pure” nonprofits, hybrid organizations, and socially responsible businesses are here to stay. The Times article makes clear that we need public discussions and enforcement actions that consider what mix of actors can best serve broad public goals, knowledge of who does what well, what is known and what is experimental, and the kind of regulatory structure that promotes the best service and protects the most vulnerable.
Lucy Bernholz is the Founder and President of Blueprint Research & Design, Inc, a strategy consulting firm that helps philanthropic individuals and institutions achieve their missions. She is the publisher of Philanthropy2173, an award-winning blog about the business of giving, and serves as executive producer of The Giving Channel on Fora.tv.