The Philanthropy Roundtable, a group of foundations and donors that advocates for a hands-off approach to regulating charities and giving, last week released a state-by-state ranking of the rules state governments place on charities. The report’s approach has already touched off a firestorm of controversy.
Pennsylvania places the most stringent regulations on charities, according to the Roundtable’s report, while Montana sits on the other end of the spectrum.
To determine their rankings, Philanthropy Roundtable scored states in five categories: start-up regulations, annual reporting requirements, rules for paid solicitors, and audit mandates, as well as other types of oversight,, including whether states use using a multi-agency approach to enforcement.
The report found that states with relatively low regulatory hurdles had a greater concentration of nonprofits.
“When you regulate something to an excessive degree, you’re going to get less charitable vibrancy,” said Elizabeth McGuigan, Philanthropy Roundtable’s senior director of policy and government affairs.
Some nonprofit experts and regulatory officials questioned the premise that regulations inhibited the creation of nonprofits and voiced concerns about the Philanthropy Roundtable’s methodology, saying that it mischaracterized how the average nonprofit in each state is actually affected by government oversight. The report, they said, improperly concluded that the proliferation of nonprofits in a state is a result of light regulation.
Board members of the National Association of State Charity Officials cautioned that the data on state-level regulations in the report may be incomplete and suggested that organizations that were counted as nonprofits for the purposes of the report may be fraudulently characterizing themselves as charities.
“We believe that the report’s key assumption that the number of charitable organizations is a good measure for the volume of actual charitable activity needs further analysis and study,” the association’s board wrote in a statement. “For example, having multiple small charities with the same purpose could be an inefficient and ineffective use of charitable dollars, resulting in more funds being used for administration and fewer dollars for actual charitable activity.”
McGuigan disagreed, saying that the report didn’t suggest that lots of regulations directly stifled nonprofits but that there was a correlation between the two.
Cuts in IRS Funding
The rankings, released last week, come as states are poised to play a bigger role in charity regulation. The Internal Revenue Service budget for enforcement declined by more than 30 percent over 10 years, according to a 2020 report from the Government Accountability Office, the most recent available. More cuts — and weakened enforcement of charities regulation — may be on the way. In January, House Republicans voted to rescind $80 billion in previously approved funding for the service. While those cuts have not passed the Senate, the Internal Revenue Service’s budget is under close scrutiny on Capitol Hill.
McGuigan said the study is a starting point for further research, adding that she hopes it helps lawmakers at the state level craft legislation that will free nonprofits of regulations.
“All of the states have room for improvement,” she said. “We hope lawmakers and regulators can make things easier for charities help improve the lives of the most vulnerable in our communities.”
Stopping Fraud
State regulation of nonprofits is necessary to squash fraud and maintain donors’ trust in the charities they support, said Erynn Beaton, a professor at the Ohio State University John Glenn College of Public Affairs, who serves on the Ohio Attorney General’s Charitable Advisory Council. The question is whether there is a sweet spot in the amount of government oversight that can ensure confidence in how nonprofits operate without making life too difficult for charity leaders, she said.
Beaton pointed to a multi-state investigation in 2021 into Florida nonprofit Healing Heros, which absconded with more than half a million dollars from Ohio donors that was meant for Iraq and Afghanistan war veterans as just one of several examples of the success of state regulators. The family that started the charity reached a settlement with Ohio and 10 other states in which they agreed to pay monetary damages and disband the charity.
Beyond the question of how much regulation is too much, Beaton took issue with the Philanthropy Roundtable index, saying it didn’t collect current data on state nonprofit rules and used a “blunt” approach to assign states with high or low levels of regulation. For instance, if a state had relatively high fees or reporting requirements for very large charities, that level of required oversight was used to characterize the state’s approach to all charities, even those that were much smaller. And, she said, the report failed to properly take into account many exemptions available in states to filing and reporting requirements.
Beaton said the number of charities in a given state likely had little to do with the regulatory environment. Other factors, such as the level of government funding to support nonprofit work and the needs of a state’s residents, drive how many charities set up in each state.
“This report makes some very large claims that the methodology just doesn’t support,” she said. “The size of the nonprofit sector has much more to do with need and resources in the state than it does the regulatory burden.”
It is difficult to capture the nuances of how charities actually experience regulations, said Cindy Lott, director of the philanthropic leadership doctorate program at Indiana University’s Lilly Family School of Philanthropy.
Lott, who has studied state regulation of nonprofits for years, spearheaded an effort to develop another study of state charity rules, called the Regulatory Breadth Index of state charity regulation. She declined to comment directly on the new Philanthropy Roundtable index.
The two indexes differ in several ways. Lott’s Regulatory Breadth Index assigned a value to more than 40 regulatory variables in the 50 states and the District of Columbia. The Philanthropy Roundtable index scored 22 categories of rules and did not include D.C. Each index weighted separate categories of regulations equally, meaning, for instance, that audit requirements did not matter more than registration fees. But the two indexes tabulated the variations like exemptions or differences in fees differently.
While Montana and Pennsylvania were on opposite poles in the Philanthropy Roundtable rankings, in Lott’s index, Idaho was identified as the state with the lightest regulatory regime and Tennessee with the heaviest.
But Lott, who said the Regulatory Breadth Index was created after years of work with state charity officials and was peer reviewed, said the goal was not to pick winners and losers. The index, she said, was not created with the assumption that regulations hindered the growth and effectiveness of nonprofits. She noted that unlike business regulation in which customers or competitors can take for-profit organizations to court, victims of nonprofit malfeasance often don’t have the legal right to sue a nonprofit; that role is reserved for state regulators.
Lott wrote in an email: “Methodology matters, and legal data is notoriously difficult to translate into accessible quantitative data. Nuance matters as well,” she wrote, explaining that a state can have a lot of regulations, but it is difficult to measure how tightly they are enforced or if smaller charities or specific types of nonprofits are exempt from some rules.
Lott continued: “A state with narrowly applicable statutes and/or many exceptions may actually have similar robustness in its regulation to a state that has fewer statutes that are more broadly applied.”
In response, McGuigan stressed that more work was needed to assess the impact of state regulation on charities.
“There are different regulations that affect different sizes and different types of charities in different ways. There’s no perfect measurement,” she said. “We can’t capture all of that in this first approach.”
While further investigation into how regulations are enforced in each state would illuminate more about the regulatory burden nationwide, the Roundtable’s report is a good starting point to understand the various things charities have to do to operate in each state, said Patrick McLaughlin, senior research fellow at the Mercatus Center at George Mason University, who served as an adviser to Philanthropy Roundtable in compiling and analyzing data for the report.
There has to be some level of regulation in place governing nonprofits, McLaughlin said, but deciding which regulations are helpful and which do harm is beyond the scope of the Roundtable report.
"There’s useful regulations and then there’s red tape,” he said. “The optimal level is to keep the useful ones and get rid of the red tape.”
Nathan Dietz, a senior researcher at the University of Maryland’s Do Good Institute, who worked with Lott on the Regulatory Breadth Index, said that he thought it was “strange” to focus on the idea that charity regulation resulted in fewer charities. The prevailing assumption among those who study charity law, he said, is that regulation did not inhibit growth in the number of charities.
But he agreed with McGuigan that the states are where the action will be. According to state legislative action compiled by the National Council of Nonprofits, debates on whether some or all charities should be exempt from property taxes are already underway in a number of states, including Arizona, Maryland, New York, and Wyoming, where legislation is pending.
Said Dietz: “At the federal level, the IRS is not making moves to get more involved in a hands-on way with regulating charities.” Any action, he said, will happen at the state level.
