A forthcoming research paper for Philanthropy Roundtable by Pacific Research Institute economist Wayne Winegarden examines regulations on the charitable sector by state. We can all agree there is a level of regulatory oversight that is appropriate to protect donors from fortunately rare cases of fraud and abuse among bad actors. Between the IRS and the states, charities are strictly regulated under current law.
However, the imposition of additional layers of regulation – with no evidence of systemic problems arising from rules already in place – is not an effective means of building public trust or compliance, and in fact, could have negative implications for the charitable sector. In order to better understand the impact of excessive regulations, the Roundtable believes more research is needed. In his analysis, Winegarden ranks states on factors such as regulatory burdens associated with starting up charities, annual filing fees, the stringency of audit requirements and other regulations. These findings yield important insights on the impact of overregulation on the charitable sector.
A key conclusion of the forthcoming paper is that states with lower regulatory burdens are home to a greater number of charities. This point can be illustrated when we look at two very similar neighboring states, separated by only a river: Delaware and New Jersey.
Delaware is among the top five friendliest states for the charitable sector. It is home to about 79 charities per billion dollars of economic output (GDP). In Delaware, new charities pay an $89 incorporation fee and do not need to apply separately for exemption from the state corporate income tax. Each year, charities are required to pay a maximum of $25 in annual filing fees.
Meanwhile, on the other side of the spectrum are states like New Jersey, which impose far higher burdens on charities. The Garden State is home to relatively fewer charities, at just under 53 charities per billion dollars of economic output. In New Jersey, new charities are subject to a $75 incorporation fee, plus a top registration fee of $250, and they must apply for exemption from the state corporate income tax. Compared to the $25 annual fee in Delaware, New Jersey charities could face up to $250 per year in annual filing fees.
New Jersey and Delaware are just two examples of states where we can draw conclusions about the impact of overregulation on charitable activity. With the publication of the full report in the coming weeks, we hope to shed more light on the impact of heavy-handed policies on the vitality of the sector in all 50 states. In the meantime, with Giving Tuesday fast approaching at the end of November, we encourage policymakers to consider the negative consequences that imposing heavy burdens on charities may have on our communities – and those most in need of help.
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