Soon after the launch of the Community Impact Coalition, which is fighting potential tax increases on nonprofits, the group posted a slick video on its website featuring charities meeting basic needs.
The music starts upbeat and inspiring. “Nonprofit organizations are the heart of our communities. They feed the country, shelter the homeless, educate children, and support veterans and hard-working Americans. These mission-driven organizations step in where government and business can’t or won’t.”
Then the soundtrack turns ominous. “But now their vital work is under threat. Lawmakers in Washington are eyeing nonprofit resources to raise revenue. If these essential services — like medical breakthroughs, disaster relief, and veteran support — were to disappear, the impact on our communities would be devastating.”
It’s a statement that is undoubtedly true — it’s hard to imagine an America without food banks, shelters, and youth-mentoring programs.
But would it be devastating if some of the members of this particular coalition had to pay more in taxes? Only a few are public charities, and none bear any resemblance to the frontline providers of basic needs touted in the video. The vast majority of the members of the Community Impact Coalition are trade associations that are exempt from federal tax under a different part of the tax code.
Here’s a representative sampling: The Agricultural Retailers Association. The American Association of Immunologists. The American Beverage Association. The Construction Management Association of America.
“This is hardly a coalition of food banks and women’s shelters,” Scott Hodge, president emeritus of the Tax Foundation, told the Chronicle back in January when the coalition was announced. “It’s another K Street AstroTurf organization trying to defend corporate interests.”
The formation of the Community Impact Coalition gets at a question that was burning in Washington even before the clash between President Trump and Harvard University — or his rumored Earth Day takedown of climate groups — added “tax-exempt status” to the national dialogue.
What is a nonprofit, and do all nonprofits deserve the same tax-exemption?
That debate, which has simmered since the formation of the philanthropic sector, has moved to the front burner again this year for two reasons. First, as the video hinted at, Republicans will need as much as $2 trillion in spending cuts to help pay for the extension of the 2017 tax cuts, most of which expire at the end of this year. The growing nonprofit sector presents an inviting target.
And the second reason is Scott Hodge himself — the leading voice calling for greater taxation of nonprofits that are “businesslike” in function. Hodge is viewed by many in philanthropy as a loud and colorful gadfly but also someone who’s done his homework.
Hodge has published a series of highly influential papers that could serve as a playbook for how Congress could go after nonprofits — whether it happens this year or in the future. Hodge argues that the nonprofit world is dominated by large charities that should be paying taxes.
As a writer, Hodge has range. He collaborated with two professors on an academic paper this spring, but he’s also a contributor to op-ed pages, and he regularly rants on X. Love him or hate him — podcaster Cecilia Sepp recently introduced Hodge as “the author of the white paper causing all the turmoil” — Hodge comes at the debate with some common-sense questions.
- If Duke basketball star Cooper Flagg pays tax on his multimillion-dollar “name, image, and likeness” deal, why shouldn’t the tax-exempt NCAA pay tax on the billions it receives from networks to televise football and basketball?
- If tax-exempt credit unions continue to buy up small banks, why should they also continue to dodge the taxes that banks must pay?
- If NYU Langone Health can afford to spend an estimated $8 million on a 30-second Super Bowl ad, does the tax-exempt hospital really need a subsidy from taxpayers?
“This is a debate that goes back 120 years,” Hodge says. “Even when nonprofit status was being debated in 1909, there was concern about the slippery slope of allowing certain types of business income to be tax-exempt.”
Sandra Swirski, a lobbyist for foundations and nonprofits, had Hodge’s paper in mind last fall when she told the Chronicle that the threat to the nonprofit sector “is probably the greatest and the most existential since 2000.”
And that worry hasn’t quieted down. Steve Taylor, a senior adviser to the Charitable Independence Initiative and a longtime lobbyist for nonprofits, wrote a column about the threats to tax-exempt organizations in April that is among the Chronicle’s most widely read stories this year. Taylor mentioned Hodge by name no fewer than three times.
Hodge served as president of the conservative Tax Foundation for two decades before stepping aside to write a book, Taxocracy: What You Don’t Know About Taxes & How They Rule Your Daily Life. The research for that book led him deep into the weeds of nonprofit finance, and what he found formed the basis for his belief that much of the sector should be taxed. Earlier this year, Hodge joined the public-finance team at Arnold Ventures , which works to advance policies focused on fiscal stability, as a tax and policy fellow.
Hodge acknowledges that “benevolent” nonprofits exist, but he prefers to talk about the ones that he believes aren’t. The ones that he thinks need to start paying taxes. Nonprofit hospitals. Credit unions. The NCAA. Kaiser Permanente. Universities with large endowments. And many more.
Hodge’s “turmoil”-causing report from last June lays out the details. Of the nonprofit world’s $3.3 trillion in annual revenue, $800 billion runs through groups that aren’t public charities, such as credit unions, private foundations, and trade associations. Of the $2.5 trillion received by actual charities, 55 percent went to nonprofit hospitals and insurers. Changing tax law to tax businesslike activity among nonprofits at the corporate tax rate of 21 percent could produce revenue of $40 billion a year, Hodge says.
“The world that we traditionally think of as ‘charity’ is shrinking,” Hodge says. “The charitable portion of this tax-exempt economy is very, very small.”
Universities, Credit Unions at Risk
Most nonprofit experts disagree with him. “Who does this Scott Hodge person think he is?” Rusty Stahl, president of Fund the People, a charity that seeks to maximize investment in the nonprofit work force, asked in a recent interview.
“I find it ironic that conservatives who are supposedly all about cutting taxes want to dramatically increase taxes,” Stahl says. “They’re trying to ramp up taxes on the very organizations and institutions that are delivering the public good, even as the conservatives running the government are trying to destroy the social safety net.”
Hodge is influential in Washington, but it’s unclear whether Congress will adopt his ideas. Republican tax writers on the House Ways and Means Committee have indicated they may release details and vote on the tax package as soon as next week.
A leaked document from the House Budget Committee in January listed the possible taxation of credit unions and hospitals — and a bigger tax on university endowment income — among hundreds of other ideas for generating revenue to help pay for tax cuts.
Hodge thinks all three of those things will happen. Others say that universities are the most vulnerable, since a small tax on their investment income is already on the books.
John Griffith, a director at Hirtle Callaghan, an investment firm that helps colleges manage endowments, says he’s spoken with two lobbyists who believe the threshold for taxing endowments will change from universities with assets of $500,000 or more per student to those with just $250,000 per student — and that the tax on investment income at those endowments will rise sharply, from 1.4 percent to 12 percent. Such a move would have a devastating impact on financial aid at smaller institutions like Spelman College that might become subject to the tax, Griffith argues.
“These organizations are trusted to do something for the public benefit,” he says. “Taxing them just because they’re successful doesn’t seem to make sense.”
Hodge, no surprise, is on the other side. He argues in a new policy brief that endowment income should be taxed just like retirement-account withdrawals. “The needs of students seem hardly more important than the needs of retirees,” he writes.
Hodge’s broad focus on adding new taxes to the nonprofit world is unique, but he has plenty of high-placed allies eyeing specific segments.
Sheila Bair, a former chair of the Federal Deposit Insurance Company, who played a key role in the government’s response to the 2008 financial crisis, argued in an op-ed in February that credit unions have expanded beyond their mandate to serve low-income communities and that the time has come to tax them.
In a January op-ed, Mitch Daniels, president emeritus of Purdue University and a former governor of Indiana, scoffed at the idea that big-time college football deserves continued tax exemption. “How long will colleges be able to maintain the fiction that their sponsorship of professional football is for the purpose of advancing education?” he wrote.
After NYU Langone bought its Super Bowl ad, Republican U.S. Rep. Greg Murphy of North Carolina sent a letter to its CEO noting that studies have shown that tax-exempt hospitals spend less money on charity care than for-profit hospitals and asking the hospital to respond to 10 questions. (Representative Murphy later publicly backed down — days after a private jet registered to the billionaire benefactor of the medical center visited the sleepy airport near where Murphy lives, according to the New York Times.)
Lobbyists for sectors under the greatest threat acknowledge the risks.
Leonard Marquez, senior director of government relations at the Association of American Medical Colleges, says Congress is weighing a long list of ideas for generating revenue, and advocates for nonprofit hospitals must make their case directly to legislators if they want to maintain their tax exemption.
“We need to operate and advocate as if all of these things are on the menu,” he says.
Jim Nussle, president of America’s Credit Unions, a trade association, says he’s worried not only about attacks from banks and the likes of Hodge and Bair but also about the cavalier approach Congress may embrace as it looks to pay for its tax bill.
“Unlike in times in the past, we are not talking about what is good tax policy,” says Nussle, a Republican who served in the House as a U.S. representative from Iowa for 17 years. “We are talking about how Congress can get enough revenue while the rest of us are not looking, so they can pay for the thing they want to pay for.”
‘Ton of Sharp Knives’
Amid the near-daily attacks from the Trump administration, the nonprofit world is already in defense mode. So when it comes to this issue, advocates for the broader sector are largely standing as one.
Rick Cohen, a spokesman for the National Council of Nonprofits, had little to say about the video posted by the Community Impact Coalition, aside from noting that any effort to elevate nonprofits should be celebrated.
Most charities, he says, are seeing increased demand for their services and increased costs due to inflation.
“If some organizations are getting into areas that feel businesslike — that’s not something to attack or criticize,” Cohen says. “It’s the organization trying to survive and help as many people as possible.”
Now is not the time to try to differentiate between the relative worthiness of soup kitchens and trade associations, he argues.
“We all agree that increasing costs, creating new taxes, doing anything that pulls resources away from the mission of helping communities is harmful, whatever section of 501(c) that we’re under,” Cohen says. “That’s something we all have in common.”
Independent Sector declined an interview request but shared a statement from Jeffrey Moore, the group’s chief strategy officer.
“It is hard to imagine that members of Congress would want to be seen as taxing the good work of nonprofit organizations in their communities when their services are certainly to be in higher demand as federal programs go away,” Moore wrote.
Phil Hackney, a law professor at the University of Pittsburgh who specializes in nonprofit issues, called for taxes on nonprofit hospitals and private foundations in early 2024, but he thinks neither would be wise amid the Trump administration’s attacks on the nonprofit world.
“I stand by what I wrote in terms of those times,” Hackney says. “I just think we’re in deeply different times. We should sit still at this moment in time — not because what I’ve argued about before is wrong but because the circumstances that we exist in at the moment are ripe for a total destruction of our civil society.”
Even in conservative circles, Hodge’s approach doesn’t have unanimous support.
New taxes are the wrong approach if Congress wants to see, for example, greater charity care and community investment from nonprofit hospitals, says Elizabeth McGuigan, a senior vice president at the Philanthropy Roundtable, which supports free enterprise and low taxes and has many conservative foundations as members. Congress should revamp those standards and hold nonprofit hospitals more accountable, she says.
“There are a ton of sharp knives that lawmakers have to ferret out the concerns they see,” McGuigan says. “They don’t need to use the sledgehammer.”
While it’s natural for the tax-exempt sector to want to stick together now, some charitable experts are exploring tradeoffs — how taxing certain areas could generate revenue to benefit other areas with arguably greater need. That kind of thinking was on display in a recent op-ed by Howard Husock, a senior fellow at the American Enterprise Institute, who proposed a new tax on private foundations as a way to help reverse the decline in everyday giving. Proceeds from the tax could be used to help pay for an “above the line” charitable deduction that any donor could use, he argued.
A Century of Questions
Hodge’s work ties into a long history of skepticism about what should be considered tax exempt. A U.S. senator in 1909 worried that there would “very little left” to tax if Congress carved out an exemption for mutual-benefit associations. Unrelated business income tax (UBIT) rules were created in the 1950s after New York University bought a pasta company and began booking tax-free profits. “Eventually all the noodles produced in this country will be produced by corporations held or created by universities,” complained a congressman in a 1950 report.
More recently, scholars like Hackney and John Colombo, an emeritus law professor at the University of Illinois, have called for changes to nonprofit taxation. At a House hearing in 2014, Colombo argued that one solution “would be to jettison the relatedness test for the UBIT and impose tax on all commercial activities by charities, whether related or not.”
Hodge comes out of that tradition — he’s no blind Trump supporter. On X, Hodge has criticized many of Trump’s tariff maneuvers. But just because Trump is creating upheaval for nonprofits is no reason to back away from logical tax changes, Hodge and his supporters say.
“Everyone is for tax reform until the rubber meets the road,” says Adam Michel, director of tax policy studies at the Cato Institute, who has written his own research report calling for revoking tax-exempt status at charities that compete against for-profits. “We should be advocating for good policy and neutral tax treatment. And we should be doing that irrespective of other moving pieces.”
Hodge’s biggest complaint is that the UBIT rules are no longer working, especially the “relatedness” test.
Hodge highlights the “relatedness” challenge in the UBIT rules by offering up an example from an art museum. At the gift shop, a coffee cup featuring a Monet painting might be deemed “related” and thus tax-free, while a similar cup featuring an “I love NY” message would be deemed unrelated and taxable.
“It’s so abstract and archaic, it can’t be enforced,” Hodge says. “Let’s get away from that and move toward some other threshold.”
Hodge’s preferred solution is outlined in his most recent paper with two academic co-authors — protect charitable donations and some government grants (but not contracts that might be bid on by for-profit firms), and tax everything else. Most of that information is available on the 990 tax return that nonprofits must file.
“It’s not that hard to move toward the system I’m talking about,” Hodge says.
What does that mean for youth-serving charities or providers of services to the aged that receive few private donations and get 85 percent of their budget from the government? Would they survive with their tax-exempt status intact? Hodge acknowledges that he hasn’t worked that out yet.
“Government grants are a gray area,” he says.
What is clear under Hodge’s scheme: Nonprofits that aren’t considered charities and don’t receive donations, including the many trade associations in the Community Impact Coalition, would begin paying tax on all sources of income.
To Hodge, that only makes sense. Companies that offer memberships, such as Amazon and Costco, must pay tax on the dues they collect. Trade associations don’t — and those untaxed dues can add up.
When Hodge first heard about the Community Impact Coalition, he quickly checked the 990 tax form of its sponsor, the American Society of Association Executives, to see how much it was paying its CEO. (Hodge himself earned roughly $394,000 in 2021, his last full year heading the tax-exempt Tax Foundation.)
He learned that in 2023 Michelle Mason, ASAE’s president, earned more than $1 million in total compensation from the ASAE and its foundation.
“How can that be a nonprofit?” Hodge asks.
