Letter to the Editor: More Research Is Needed on State Regulation of Charities

In a Letter to the Editor of The Chronicle of Philanthropy, Philanthropy Roundtable’s Senior Director of Policy and Government Affairs Elizabeth McGuigan and Senior Fellow in Business and Economics at Pacific Research Institute Wayne Winegarden responded to a recent article entitled New Report on State Charity Regulation Touches Off Debate About What Helps Nonprofits Thrive. Last month, Philanthropy Roundtable released a new report ranking the 50 states based on their regulatory burdens on charities. 

The report carefully outlines the major features of state regulatory structures and argues that, while some level of regulatory oversight is important, excessive burdens on charities are associated with fewer charities in a state. The Chronicle of Philanthropy reported on the study, calling it “controversial,” featuring opinions of a handful of critics about how we compiled the rankings. Although the featured critiques appear to fall short of a “firestorm of controversy,” it is important to note that the limitations in the methodology are thoroughly caveated throughout the report. There are myriad factors that determine the number of charities in a state. That is why we specifically advocate for more research in this area as it’s needed to fully understand the impact of overregulation on charities. 

Read the Letter to the Editor, published in The Chronicle of Philanthropy, below:

“We are pleased to see the robust conversation reflected in last week’s Chronicle of Philanthropy article “New Report on State Charity Regulation Touches Off Debate About What Helps Nonprofits Thrive” (February 9). Such a dialogue is long overdue and is ultimately the purpose of the Philanthropy Roundtable report we authored — and on which the story is based.

Starting a discussion about which regulations create net benefits and which regulations impose net costs is essential. However, as the study emphasizes multiple times in issuing its state scores, “This is an imperfect ranking based on imperfect variables.” That does not mean it isn’t a worthy endeavor. Much more can be learned about this topic, and additional research is needed.

It’s widely accepted that state regulations on charities can create important benefits: promoting trust and discouraging fraud. But how these regulations are implemented matters. The notion that regulations will impose net costs when taken to excess should not be controversial.

Research is needed on when regulations transform from being beneficial into a financial burden, and into how they affect a charity’s financial viability.

Take California’s rules that apply state and local sales taxes to most charities. This regulatory decision increases costs for California’s charities by 9%. In Tennessee, by contrast, charities are exempt from the roughly 9.75% sales tax. Given the challenges of running a charity, greater examination is needed of how these different regulatory approaches affect a charity’s ability to fulfill its mission and serve its community.

The study is intended as an initial analysis that spurs debate and further research. Ultimately, the vibrancy of the charitable field in the United States is too important to rely on potentially faulty assumptions that regulations don’t have a negative impact on the work charities do and the people who rely on those organizations.”

Read more at The Chronicle of Philanthropy.

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