Nonprofits and Tax Reform

by Reihan Salam

There is a serious problem with an individual cap on tax expenditures, namely that it will essentially eliminate the incentive at the margin to, among other things, make charitable contributions. This might be a price worth paying if Congress can’t settle on a plan that makes hard choices regarding which discrete tax expenditures to curb or eliminate, but it does suggest that a generalized resistance from the non-profit sector and the real estate industry and other constituencies might prove formidable. To get a sense of what this might mean, consider the following from John DiIulio Jr.’s “Facing Up to Big Government,” which we discussed in May:

In 2009, the non-profit organizations recognized as “public charities” by the U.S. Internal Revenue Service reported about $1.4 trillion in spending while holding $4 trillion in total assets (for comparison, the total assets of state and local governments were about $4.6 trillion). In total, the nonprofit sector employed about 13.5 million people (roughly a tenth of the American workforce) and accounted for about 5.5% of GDP.

This army of nonprofit employees could prove a bulwark of opposition to tax reform. One obvious way to deal with this problem is to exempt charitable deduction from the cap, but this would reduce its effectiveness and it might engender resentment from other constituencies. Any way you slice it, this will be a difficult debate.