This fall the Senate Finance Committee plans to introduce new legislation covering private foundations, donor-advised funds, public charities, and other tax-exempt organizations. As reported in our cover story, Senator Charles E. Grassley (R-Iowa), chairman of the Finance Committee, held hearings on this subject on June 22, 2004, and released on June 21, a staff-prepared “discussion draft” outlining possible proposals for the forthcoming legislation.
The Philanthropy Roundtable believes that a number of proposals in the discussion draft would seriously harm philanthropy, civil society, and the vision of “a nation of citizens, not spectators,” articulated by President George W. Bush in his inaugural address. We have six significant concerns about the Finance Committee’s proposals.
First, we are deeply troubled by a proposal giving the Internal Revenue Service the power to review and revoke the tax-exempt status of every charity and foundation every five years. This automatic power, unless it is very carefully circumscribed, would be an open invitation for presidential administrations to use the IRS as a weapon against charities and foundations they disagree with philosophically. Even if tax-exempt status were not revoked, a serious IRS challenge to the exemption would tie up in administrative knots a politically disfavored charity or foundation, making it much more difficult to carry out its mission. The danger of abuse is potentially even graver when the new IRS power is combined with another proposal in the discussion draft, which would make continued tax exemption contingent on approval by a private accrediting agency for charities or foundations. Unless there is a wide variety of philosophically diverse accrediting agencies, or unless there are very minimal standards for accreditation, an accreditation requirement could pose a serious threat to independent thought in charitable and philanthropic organizations.
The second danger of the Finance Committee discussion draft is its proposed micromanagement by the federal government of internal decisions that have historically been the responsibility of foundation donors and boards. This interference in private decisions includes restricting travel expenses, sharply restricting staff compensation, even more sharply restricting (or eliminating altogether) trustee compensation. This is a departure from a long tradition in federal and state law of respecting the diversity of the philanthropic sector in terms of mission, philosophy, size, operating style, and division of staff and trustee responsibilities. The tax exemption has been framed broadly to encourage this diversity and flexibility, and regulations such as those guarding against self-dealing and investment abuse have been minimally intrusive. By contrast, the Finance Committee discussion draft suggests that government knows better than foundation leaders how their organizations should be run in order to achieve their mission. Such micromanagement has no place in a free society.
The third and fourth dangers were well articulated at the June 22 hearings by Derek Bok, formerly president of Harvard University and now faculty chair of its Hauser Center for Nonprofit Organizations. Bok reminded the Senators that “the nonprofit sector is extremely heterogeneous, including everything from billion-dollar hospitals and universities to tiny neighborhood organizations and local choral societies.” He then said at least two risks arise in any attempt to craft general regulatory measures for the sector. “First, there is a danger that in enacting rules in response to a few particularly flagrant, widely publicized abuses, regulators will impose burdens of paperwork, record-keeping, and other costs on all nonprofits that will more than equal any benefits achieved by government intervention. Second, in such a heterogeneous sector, it is quite possible that rules enacted with particular organizations in mind will prove inappropriate for other kinds of organizations and thereby lead to unanticipated, undesirable consequences.” Additional excerpts from Professor Bok’s testimony are printed elsewhere in this magazine.
A fifth danger comes from proposals in the discussion draft to regulate donor-advised funds—and particularly to require the public disclosure of their contributions. Private foundations have prospered under their public disclosure requirements of the past 35 years, and they would not suffer under proposals in the discussion draft to ensure more accurate and timely filing of IRS Form 990-PFs. However, individual donors have always enjoyed the right to keep their charitable contributions confidential if they wish. One of the many advantages of this right to privacy is that it enables donors to give generously without being besieged by legions of grant-seekers. Disclosure requirements for donor-advised funds would most likely reduce charitable giving by taking away a highly efficient vehicle for living donors who cherish their privacy.
A sixth danger comes from a proposal for government to subsidize efforts within the philanthropic sector to encourage best practices and set accrediting standards. The money would come from the tax on net investment income on foundations. The Philanthropy Roundtable believes that it would be totally inappropriate for the philanthropic sector to turn to government to raise resources for its own self-improvement. Philanthropists and the organizations that serve them have the resources to raise this money themselves. Turning to government for financial help would also be deeply corrupting to the spirit of independence and voluntary initiative that animates philanthropy at its best.
The Finance Committee has presented no evidence that sweeping changes of the magnitude it is proposing in the legal and regulatory framework governing philanthropy and nonprofits are necessary. Most abuses in the philanthropic sector could be corrected by more resources in the enforcement of existing laws. Some narrowly tailored adjustments in current policy may also be needed to address specific problems. The Finance Committee discussion draft is a blunderbuss that would cause enormous collateral damage to the sector it purports to reform. What we really need are precision-guided weapons.
Adam Meyerson is president of The Philanthropy Roundtable.