July 02, 2012

Court’s Health-Care Ruling Offers Little-Noticed Threat to Nonprofits

Richard White/Chronicle of Philanthropy

The Supreme Court’s decision last week to uphold the nation’s health-care law predictably drew much praise from foundations and charities that help the nation’s most vulnerable citizens.

The verdict is far from conclusive, however, that the law is smart public policy. Conservative and liberal nonprofits have spent the past few days rethinking their public-policy strategies and gearing up for the inevitable battles yet to come over what Congress and the states should do next.

Amid the controversy over health-care policy, nonprofits must keep an eye on an outcome that wasn’t anticipated in the ruling over the constitutionality of the law.

The court’s logic in the health-care case makes it unmistakably clear that lawmakers have the authority to increase government control of tax-exempt groups. Of particular concern, the ruling opens the way to the adoption of measures such as limiting charity tax exemptions to groups that provide direct benefits to the poor and allowing tax deductions only for donors to those groups, proposals that have gained growing support in recent years among some members of Congress and other lawmakers.

The root of the potential problem for nonprofits lies in the way that Chief Justice Roberts crafted his majority opinion to uphold the health-care law.

The Obama administration and many others had pushed the idea that the constitutional authority of Congress to regulate commerce among the states gives it the power to require individuals to buy health insurance. But that wasn’t the grounds on which the Roberts ruling rested. Instead, the chief justice said in his majority opinion that the requirement to buy health insurance or otherwise pay a penalty is justified under Congress’s right to impose taxes.

The Constitution, he said, gives Congress extremely broad power to tax, and “taxes that seek to influence conduct are nothing new.” After explaining in detail what tests a congressionally imposed requirement must meet to be considered a tax, he concluded that the mandate for individuals to acquire health insurance met all of them.

Although the analysis was directed toward Congress’s taxation authority in regard to mandatory health insurance, the ideas articulated in the ruling should be sobering to nonprofits and foundations that rely heavily on their tax exemptions and on the tax breaks their donors receive for their contributions.

The opinion by Chief Justice Roberts makes it clear that if lawmakers voted to impose restrictions on tax-deductibility or tax exemption, they would not face any constitutional obstacles.

The nonprofit world’s right to determine what causes it wishes to pursue has deep historical roots. And the right of Americans to give money to help others has largely gone unchallenged. So no matter what happens to the federal tax code, groups that promote their own visions of the common good can always expect to gain significant support from generous donors.

But since the beginning of the 20th century, one of the key reasons donors have been willing to part with a big share of their incomes is that they get tax deductions for their gifts. That benefit, along with exemptions from federal, state, and local taxes, are what allow many nonprofits to thrive.

For decades, lawmakers and regulators have placed relatively few restrictions on what charities could do, or what causes donors could support, as long as the groups directed their efforts toward a broadly defined range of activities generally regarded as charitable.

But in recent years, lawmakers and Congress have been debating whether it’s time to change the basic ground rules.

Tax deductibility, they argue, should be exclusively available—or at least be far more generous—for contributions that benefit the poor or minorities. And tax exemptions, they say, should be limited to organizations that provide services government would otherwise be required to offer or to nonprofits that devote most of their resources to helping people in need.

Proposals like these haven’t gotten very far at either the federal or state level, but at a time when budget deficits are hobbling governments, it is highly possible these ideas will gain greater favor.

That’s why the health-care ruling should serve as a reminder to nonprofits that an important source of their financial support exists only because Congress and the states have granted them special privileges.

After the Affordable Care Act decision, the courts will be a far less hospitable place for nonprofits that want to appeal any new limits placed on their tax exemptions or on the tax breaks available to their donors, since, as in the current legal thinking summarized by the chief justice, “more often and more recently, we have declined to closely examine the regulatory motive or effect of revenue-raising measures.”

Nonprofits can take solace in the fact that today they enjoy general popularity in the halls of government, but that is not the same as having an independent legal basis of legitimacy. American philanthropy is a creature of the shared understanding among policy makers that its activities are so beneficial to the common good it deserves special privileges. But the Affordable Care Act decision emphasizes that such privileges are ultimately defined by politics, no matter how much nonprofits emphasize that they are separate from government (and business).

Especially in the wake of last week’s Supreme Court decision, charities and foundations should be prepared for a continuing process of renegotiation with both lawmakers and the voters who put them in office.


Leslie Lenkowsky, a Chronicle columnist, is a professor of public affairs and philanthropic studies at the Center on Philanthropy at Indiana University, where Suzanne Garment is a visiting fellow. His e-mail address is llenkows@iupui.edu.