Nonprofit Organizations, Social Benefits, and Tax Policy**

I ASE broadening and rate reduction confront some fundamental and nearly 3were the yin and yang of Federal inintractable problems in any effort to idencome tax policy in the 1980s. When choostify nonperforming nonprofits and set them ing among those Code provisions with base on the path of righteousness. This social broadening potential large enough to make benefits concern is the focus of this paper. nieaningful payments for rate reduction, The first section is devoted to looking questions of economic efficiency and eqfor insights about nonprofit provision of uity were often important considersocial benefits in the rationales for the ations-recall the debates over capital nonprofit sector. The discussion suggests gains, depreciation allowances, tax-exthat the market conditions that produceempt bonds, and state and local tax denonprofit firms are no guarantee that soductions, to name but a few. One provicial benefits are produced by nonprofit sion left relatively untouched in the 1980s, firms. Several ways in which some nonthe tax treatment of nonprofit organizaprofit organizations might fail to provide tions, appears about to receive consideradequate social benefits are discussedable legislative scrutiny. philanthropic paternalism, violation of the Nonprofit organizations classified unnondistribution constraint, and asymmetder section 501(c) of the Code receive the ric information failure. benefit of exemption from corporate inAlthough these economic theories of the come taxation. The subset of nonprofit orvoluntary sector and its potential failure ganizations classified under section are relatively precise, it is empirical evi501(c)(3) of the Code receive two addidence that motivates the policy process to tional tax benefits: a direct benefit from produce corrective legislation. Unfortuaccess to tax-exempt bond financing, and nately, measuring the extent of failure and an indirect benefit attributable to donor the magnitude of social benefits presents deduction of contributions from individboth conceptual and data problems, not ual or corporate taxable income. the least being that the measurement of Congress seems to have two primary social benefits is to some extent a subjecconcerns about 501(c)(3) organizations. tive business. The second section disOne is characterized as "unfair competicusses a selection of some of the available tion," whether nonprofit organizations are empirical information that documents using their tax-exempt status to compete some nonprofit failure and abuse. unfairly with for-profit firms. Concern is The third section discusses proposed focused on the adequacy of the unrelated legislation that attempts to require an inbusiness income tax (UBIT) provision as crease in the social benefits component of a deterrent to nonprofit commercial activnonprofit hospitals. The final section disities unrelated to their exempt activities cusses alternative strategies for changing (even if the revenue is to be used to furthe tax treatment of nonprofit organizather the exempt activity). tions, and raises some questions about The second congressional concern is present and future tax policy in this area. more general and would persist even if the unfair competition/UBIT issue disappeared-are 501(c)(3)s providing social The Economic Rationale for benefits commensurate with the value of Nonprofits the tax benefits they are receiving9 ConTwo economic rationales have been adgress and the Treasury Department must vanced to explain the existence of non*Congressional Research Service, Washington, DC profit organizations in the economy. The 20540. first hinges on the usual public goods ar-