Hodge: Reining in America’s $3.3 Trillion Tax-Exempt Economy

Scott Hodge (Tax Foundation) has posted Reining in America’s $3.3 Trillion Tax-Exempt Economy. Here are the Key Findings:

• For over a century, lawmakers have exempted politically favored organizations and industries from the tax code. As a result, the tax-exempt nonprofit economy now comprises 15 percent of GDP, spans more than 1.8 million organizations, and manages over $8 trillion in assets. In 2019, it pocketed more than $238 billion in net income.

• The tax-exempt sector is overdue for review and reform. The U.S. needs a principled, rules-based approach to 1) distinguish between benevolent organizations and tax-exempt businesses, and 2) level the playing field between the business activities of nonprofit and for-profit entities.

• Many industries exempted from the income tax were designated as such in the Wilson-Gorman Tariff Act of 1894 and the Tax Act of 1909, but they reflect the social norms of the 19th century, not our 21st century economy.

• The majority of tax-exempt organizations today are business-like in form and function, including credit unions, hospitals, utilities, insurance companies, universities, professional athletic associations, golf clubs, and consulting firms, to name a few.

• Business-like income has been the fastest growing source of income for 501(c)(3) tax-exempt organizations over the past 30 years, now accounting for 71 percent of their income. Charitable donations make up just 12 percent of nonprofit income.

• More than half (55 percent) of all the income generated by 501(c)(3) organizations comes from tax-exempt hospitals and health-care plans. The largest nonprofit in America is Kaiser Permanente. Kaiser’s health plan, hospitals, and state health plans generated over $110 billion in revenues in 2019.

• In 2019, there were 325 501(c)(3) nonprofits with more than $1 billion in revenues—nearly all of which are hospitals and universities.

• The unrelated business income tax (UBIT) rules that were intended to rein in tax-exempt businesses have become toothless and have allowed the growth of large nonprofit businesses.

• A reasonable rewriting of the tax-exempt rules should include narrowing the definition of “public charity” and subjecting all non-charitable income to the corporate tax rate of 21 percent. Doing so could raise nearly $40 billion annually in new tax revenues.

Lloyd Mayer