- While there is a need for regulations on the charitable sector to foster accountability and trust in charities, excessive levels of regulation impose a burden on charities that outweighs the benefit of the regulation.
- Little research has been done to examine the impact of overregulation on the charitable sector. This study is a first step toward gaining a better understanding of the regulatory burden imposed on charities.
- By comparing states along five categories of charitable regulations, one can see that overregulation is correlated with relatively fewer charities in a state.
- Our society and those in need depend on a thriving, vibrant charitable sector. The evidence in this study suggests excessive levels of regulation are counterproductive to fostering a positive environment for charities and those they serve.
Ideally, state regulations on charitable organizations impose minimal costs relative to their benefits in terms of creating improved transparency and accountability. Like any other good or service, the benefits provided by regulation exhibit diminishing returns indicating that as the number of mandates increases, and the complexity of the regulatory structure grows, the additional benefits enabled by the regulations decline.
While the benefits gained from imposing additional regulations decline, the costs associated with complying with these mandates will increase. More burdensome state regulatory structures require charities to devote larger amounts of personnel time, money and other resources toward complying with the state mandates rather than fulfilling their charitable missions. The net value enabled by regulations will tend to decrease, consequently, as the size and complexity of their burdens grow. Further, a growing regulatory burden expands the divide between the value of the resources dedicated toward charitable efforts and the amount of public benefit these organizations can provide.
Therefore, states that impose an excessive regulatory burden undermine the efficiency and effectiveness of the charitable sector.
The way states regulate charitable organizations varies significantly, indicating the relative burdens from state regulations differ. While understanding how these burdens vary can help states create a more efficient regulatory environment, there are few resources available that provide a comprehensive comparison of the impact state regulations have on charitable organizations. The purpose of this study is to provide a broad review of state regulations to help begin to fill this gap.
The analysis classifies state regulations of charities into five categories comprised of measures that reflect the diverse types of regulations implemented by at least one state. The categories include: start-up regulations, annual reporting requirements, rules for paid solicitors, audit mandates and oversight regulations.
These categories are included because they comprise the main features of the charitable regulatory landscape. This analysis does not argue that any one specific type of regulation discussed here should be eliminated. Rather, that the full compliance burdens on charities should be weighed against the benefit of the regulations.
These five categories were weighted equally, and states were ranked separately based on the measures for each category. The state with the lowest score is ranked as having the “least burdensome regulatory environment” and receives the top rank, while the state with the highest score receives the lowest rank. Summing the ranks across the five regulatory categories provides the basis for the overall state rankings. The overall state rankings of the top five (or best) and bottom five (or worst) states are below.
The five states with the friendliest regulatory environment toward charitable organizations are Montana, Wyoming, Nebraska, Delaware and Idaho. The five states with the most burdensome regulatory environment toward charitable organizations are Connecticut, Mississippi, New Jersey, Florida and Pennsylvania. Relating these rankings to the vibrancy of the charitable sector (as measured by the number of charities per billion dollars of GDP) provides initial perspective regarding the consequences from imposing a more burdensome regulatory environment on charitable organizations. There is, in fact, a strong correlation between the states that impose more burdensome regulatory environments and the vibrancy of the charitable sector. While more research is required, the results are an initial indication that the states imposing the most burdensome regulatory environments are dimming the vibrancy of the charitable sector. Consequently, states should consider the benefits from streamlining state regulations and eliminating unnecessary burdens as a means for promoting a more efficient and effective charitable sector.