The Effect of Nonprofits’ Taxable Activities on the Supply of Private Donations

Prior research indicates that donations respond to price and income effects as well as to alternative sources of nonprofit financing. Using a database of confidential nonprofit tax returns, we examine the effects of nonprofits’ taxable activities on the supply of donations. We find that each additional dollar of taxable revenues crowds-out approximately $0.55 of donations to arts, culture, and humanities organizations and human services and public benefit organizations, suggesting that the recent rapid expansion of nonprofits’ taxable activities comes at a financial cost. We do not find that donations to educational or medical nonprofits are sensitive to taxable activities.