Nonprofits tax exempt status being tested due to weakening city cashflows

Nonprofits throughout the US are facing what may amount to becoming a huge, systematic (if temporary) and inconsistent change dependent upon the location of their operations. In different cities and municipalities throughout the States, city management are scrambling to create fresh revenue streams to assist city management who are staring at huge deficits in operational expenses in a list of city after city throughout the country. It’s rapidly creating a large obstacle for nonprofits and their tax exempt status with changing expectations dependent upon the location of the organization. Throughout the press you can read about the various degrees of implementation in different cities but fundamentally many nonprofits this summer will be cast with contributing toward costs for local police, fire and other city services. As each city calculates a formula which they deem to be fair, the actual process of collecting funds from nonprofits is yet to be clarified. Even today millions of dollars of nonprofits operating expenses are contributed to city coffers in lieu of property tax in some cities while still others currently ask for nothing.

The situation has always existed but now threatens to create a playing field so uneven that nonprofits may be tasked with either relocating operations, restructuring operations or at the very least trying to determine a suitable budget level for operations over the coming year. While not opposed to the fundamental goal of nonprofits contributing fiscally within the community and paying for resources used, my concern like many nonprofits is how will it be equitably managed on both the local level but also nationally. I don’t feel that there is suitable balance at present, for example if a nonprofit supporting health concerns in Massachusetts is challenged to contribute ‘X’ percent to city services from their running accounts while a similar organization in another state may be paying nothing. It also provides a lack of harmony to donors who in turn may decide to support a nonprofit where a larger percentage of contributions are seen to reach the ’cause’ simply based upon local jurisdiction.

Are nonprofits being unfairly asked to assist with city management costs?

As I write some cities are working out plans that in theory would see institutions pay approximately 25 percent of the equivalent amount of property taxes owed for nonexempt businesses, with a proposal for a mixture of cash and ‘deeds’ such as scholarships or community services provided. However the changes do seem to fly in the face of logic when it comes to tax exempt status, in years gone by an appropriate balance has always been maintained by nonprofits ‘doing good in the community’ which really should be the ideal status quo. Simultaneously public scrutiny over the operating practices of nonprofits continues to grow which as I’ve written before is a healthy thing, but I do not support this current change being on a local level. I think it would be healthier to see city management working with nonprofits so that applicable services can be best provided for the community rather than cash contributions.

At a time when many nonprofits are already facing difficulties in fundraising compared with a few years ago, the added liability of an unofficial tax will surely see services cut or even potentially force some organizations to face closure. This in turn puts more pressure upon city resources to fill the void that nonprofits provide in terms of service provision within the community. In the United States at least the outcome of this fragile balance may become one of the largest news stories concerning nonprofits for the year to come although I can see a cascading set of problems as a result concerning fairness and consistency. Do you feel the best solution would be a reworking of federal laws concerning tax exemption or should city management be instructed to partner with nonprofits to form a platform of services that is fair, which is currently happening in so many circumstances anyway.

[poll id=”5″]