Debate continues in Washington over limiting the charitable deduction for the wealthy to help balance the budget. Billionaires Warren Buffett and Bill Gates, in addition to influential advocacy groups like Independent Sector, an umbrella organization of 600 charities, insist that the charitable deduction is vital to preserve Americas vibrant voluntary tradition.
Yet the nonprofit sector has problems beyond the charitable deduction. For much of U.S. history, nonprofits have operated as a check on government by providing private avenues to serve the public interest. Unfortunately, American charities—and more broadly, the entire nonprofit sector—have become a creature of big government.
For decades, the U.S. government has administered research, welfare, housing and educational programs through a system of grants to state and local governments, colleges and universities, hospitals, research organizations, consulting firms and not-for-profit advocacy groups. In the past 50 years, federal spending has exploded 36-fold, to about $3.6 trillion in 2012 from $100 billion in 1962. Meantime, the number of federal civilian employees has expanded modestly in comparison—to 2.8 million in 2011 from 2.5 million in 1962. The reason the federal government can increase its spending without adding many employees is because it subcontracts so many of its functions to ostensibly private institutions. This system has gradually turned much of the not-for-profit sector into a junior partner in administering the welfare state.
The publication Giving USA, which tracks charitable spending, reports that the government now supplies one-third of all funds raised by not-for-profit organizations. Major research universities, hospitals and health centers could not survive without large allocations from the federal government, and are among the largest recipients of federal grants and contracts. They include the Dana Farber Cancer Institute ($136 million in federal grants in 2012), St. Judes Childrens Research Hospital ($56 million), the American Red Cross ($27 million) and National Jewish Health ($26 million).
According to a study by the National Science Foundation, nearly 900 research universities received federal grants and contracts totaling $40 billion in 2011. Johns Hopkins led the pack with $1.9 billion, followed by the University of Washington ($949 million), the University of Michigan ($820 million) and the University of Pennsylvania ($707 million).
The website www.opensecrets.org, which tracks money in politics, reports that many of the institutions that receive these large grants and contracts—including Johns Hopkins, the University of Washington and the University of Pennsylvania—maintain lobbying operations in Washington. In addition, influential advocacy organizations like the American Council on Education and the American Association of Universities are similarly active in promoting the interests of higher education in the federal budget.
If we leave out the large sums these institutions receive, the nonprofit sector still got $215 billion in 2010 in government grants and contracts. These funds were directed primarily to advocacy groups, social service organizations and nonacademic research institutions. According to a recent report by the Chronicle of Philanthropy, government funding of such charities grew by 77% between 2000 and 2010, while private support for such groups grew by just 47%.
Many political groups that lobby for increased government spending are major recipients of government grants. AARP, which lobbied mightily on behalf of the Affordable Care Act, has a tax-exempt foundation that received $97 million (or 82% of its revenues) in government grants in 2009.
According to the website www.USASpending.gov, the National Urban League received $16 million in 2012 and the National Council of La Raza, which lobbies on behalf of immigration reform and other issues important to Hispanics, got more than $8 million in 2010 in grants from various government departments and agencies. La Raza recently won a $100,000 grant from the National Aeronautics and Space Administration for a public-relations campaign called "Engaging the Latino Community as Only NASA Can."
Planned Parenthood, also an influential advocate for government spending, received more than $25 million in federal grants in 2012. This list could be expanded many times. Often these well-connected organizations win several grants per year from different federal departments and agencies.
Religious organizations also receive large infusions of federal funds. Catholic Charities USA receives more than half of its funding each year ($554 million in 2010) from federal grants. In 2012, the U.S. Conference of Catholic Bishops received $63 million, and World Vision, an evangelical relief organization, received $57 million in federal grants.
These are reputable institutions, and many of the programs they sponsor are important. Nevertheless, in view of their dependence upon government funds, no one can seriously maintain that these groups are "independent." Instead, they form one of the more powerful lobbying forces in Washington for increasing government spending, especially spending on tax-exempt groups.
Their interest in maintaining federal funds may compete with their concern with maintaining the charitable tax deduction. This is undoubtedly true of the larger and more influential organizations that receive large federal grants. Last year during the "fiscal cliff" negotiations, Independent Sector joined several other organizations to support a tax increase in exchange for President Obamas agreement to maintain the charitable deduction. More recently, prominent charitable groups, including the National Council of Non-Profits and the Center for Effective Government, have complained about sequester-related spending cuts.
The cozy relationship between nonprofits and the government should make us question the value of the charitable deduction in an era of expanding government. The original purpose of the deduction was to encourage charitable giving based on the belief that strong voluntary associations would reduce the need for government support. It no longer serves that purpose, given that private charities have become advocates for bigger government.
But placing a limit on the charitable deduction might make charities even more dependent on government funds. A practical step in the right direction would be to raise awareness so private donors understand that many charities seeking their contributions rely heavily on government grants and advocate for higher taxes and spending. Watchdog groups, such as Charity Navigator, should monitor the percentage of revenues charities receive from government sources so donors can honestly evaluate different organizations.
Whether or not we keep the charitable tax break is a question that should be judged broadly in terms of the role we want charities to play in our system of limited government. Those committed to preserving the charitable deduction and the integrity of not-for-profit organizations would be well advised to liberate the charitable sector from its self-defeating dependence on government.
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