# An Overview of the Nonprofit and Charitable Sector > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/crs%3AR40919 ## Record - **Collection:** Congressional research report - **Document type:** CRS Report - **Published:** November 17, 2009 - **Citation:** R40919 ## Text An Overview of the Nonprofit and Charitable Sector (name redacted) Analyst in Economics (name redacted) Senior Specialist in Economic Policy November 17, 2009 Congressional Research Service 7-.... www.crs.gov R40919 CRS Report for Congress Prepared for Members and Committees of Congress An Overview of the Nonprofit and Charitable Sector Summary A number of policy issues have direct or indirect consequences for the nonprofit and charitable sector, including the establishment of a social innovation initiative, changes in the tax treatment of charitable donations, responses to the economic downturn, and health care reform. The nonprofit and charitable sector represents a significant portion of the U.S. economy. The sector is also highly diverse. Having a greater understanding of the nonprofit and charitable sector as a whole may help policymakers evaluate proposals that may impact the sector. The first section of this report provides a formal definition of the nonprofit and charitable sector. The term “nonprofit sector” is generally intended to refer to organizations with federal taxexempt status; “charitable sector” refers to the subset of these organizations that have 501(c)(3) public charity status. The next section reports on the size and scope of the charitable sector. Charitable organizations are estimated to employ more than 7% of the U.S. workforce, while the broader nonprofit sector is estimated to employ 10% of the U.S. workforce. In 2009, the charities filing Form 990 with the Internal Revenue Service reported approximately $1.4 trillion in revenue and reported holding nearly $2.6 trillion in assets. Nonprofit institutions serving households (largely charities) constituted more than 5% of GDP in 2008. The third section of this report examines how charities are funded. Revenue comes from a variety of sources, including private contributions, payments (fees for service), government grants, and investment income. Revenue sources vary significantly across different types of charities: charities involved in health care (including nonprofit hospitals) and educational institutions rely heavily on private payments while arts, culture, and humanities charities and environment and animals charities are more reliant on private contributions. Private contributions to charities are of particular interest as charitable giving may respond to changes in the tax code. As the recent economic downturn has increased the demand for goods and services provided by a number of charities, the impact of the business cycle on funding is also discussed. The fourth section provides an overview of the charitable sector’s relationship with government. From a theoretical perspective, economics suggests that the government should subsidize activities that are either public goods or have positive external effects. It can be argued that some charitable activities possess these qualities. The costs to the government of providing grants, allowing charitable contributions to be tax deductible, exempting investment income of charities from tax, and providing property and sales tax exemptions are presented. The oversight role of the government is also reviewed. Finally, the report concludes with policy considerations. This section opens by surveying what policy options are considered most important by charitable organizations themselves. Building on this, a number of policy options are examined, including (1) increasing government grants and subsidies to charitable organizations; (2) creating an oversight agency within the federal government to gather data, conduct research, and advocate for the charitable sector; (3) implementing policies designed to help charities and foundations in economic downturns; (4) changing the itemized deduction for charitable contributions by limiting, converting to a credit, or making the deduction more widely available; and (5) a variety of other tax issues. Congressional Research Service An Overview of the Nonprofit and Charitable Sector Contents The Nonprofit and Charitable Sectors..........................................................................................2 IRS Filing Requirements .......................................................................................................3 Size and Scope of the Nonprofit and Charitable Sectors ..............................................................4 Employment .........................................................................................................................4 Revenue................................................................................................................................9 Assets ................................................................................................................................. 11 Revenue and Assets in the Broader Nonprofit Sector ..................................................... 11 Contribution of Charities to GDP ........................................................................................ 12 The Nonprofit & Charitable Sectors vs. Other Major Economic Sectors .............................. 13 How Are Charities Funded? ...................................................................................................... 16 Revenue.............................................................................................................................. 16 Revenue Sources by Charitable Sector .......................................................................... 18 Growth in Revenue Sources .......................................................................................... 20 Nongovernmental Financing: Private Contributions............................................................. 21 Government Financing: Grants and Transfers ...................................................................... 28 The Business Cycle’s Impact on Funding ............................................................................ 30 How Have Nonprofits Fared During Past Economic Downturns? .................................. 30 Charitable Contributions in Past Recessions .................................................................. 31 The Current Recession: Charitable Giving in 2008 ........................................................ 31 Endowments and Assets ................................................................................................ 33 Outlook 2009 ................................................................................................................ 34 The Charitable Sector’s Relationship with Government ............................................................. 35 Market Failures: Justifying the Subsidization of Charities.................................................... 35 Public Goods ................................................................................................................ 35 Externalities.................................................................................................................. 36 Is There an Economic Rationale for Nonprofit Hospitals?.............................................. 37 Relationship with the Federal Government .......................................................................... 38 Federal Government............................................................................................................ 38 Social Innovation Initiatives .......................................................................................... 38 Foundations .................................................................................................................. 39 Donor-Advised Funds and Supporting Organizations .................................................... 39 Endowments ................................................................................................................. 40 Charitable Contributions ............................................................................................... 40 Exemption of Tax on Investment Income of Nonprofits ................................................. 41 Charitable Contributions and Other Tax Expenditures ................................................... 43 Postal Subsidies ............................................................................................................ 45 State and Local Governments .............................................................................................. 45 State and Local Tax Benefits ......................................................................................... 45 Potential Impacts of Government Grants on Giving............................................................. 46 Government Funds and Private Funds as Substitutes ..................................................... 46 Government Funds and Private Funds as Complements ................................................. 48 Taxes and Charitable Contributions ..................................................................................... 49 Policy Considerations ............................................................................................................... 50 Increased Funding for Grants and Subsidies ........................................................................ 52 An Oversight Agency in the Federal Government................................................................ 53 Proposals to Aid Nonprofits in Economic Downturns .......................................................... 54 Congressional Research Service An Overview of the Nonprofit and Charitable Sector Foundation Grants......................................................................................................... 54 State Funding and Payments.......................................................................................... 54 Providing Economic Stimulus Funds ............................................................................. 55 The Itemized Deduction for Charitable Contributions.......................................................... 56 Other Tax Issues.................................................................................................................. 57 Channeling Benefits Through the Federal Income Tax System (Including Health Insurance Credits) ...................................................................................................... 57 Restrictions on Donor-Advised Funds (DAFs), Supporting Organizations, and Endowments .............................................................................................................. 57 Gifts of Appreciated Property........................................................................................ 58 Nonprofit Hospitals....................................................................................................... 58 Extenders...................................................................................................................... 59 The Estate Tax .............................................................................................................. 59 Figures Figure 1. Share of Workers in Each State Employed by the Charitable Sector, 2004.....................7 Figure 2. Full-Time Equivalent Volunteers as Percent of Workforce, 2004 ...................................8 Figure 3. Nonprofit Institutions Serving Households’ Share of GDP .......................................... 13 Figure 4. Revenue by Source, 2005 ........................................................................................... 17 Figure 5. Comparing Revenue Sources Across Charitable Sectors ............................................. 19 Figure 6. Charitable Giving....................................................................................................... 23 Figure 7. Giving as a Percentage of GDP, 1967-2008................................................................. 24 Figure 8. Giving to Charities by Type........................................................................................ 26 Figure 9. Charitable Contributions as a Percentage of Output, 1967-2007.................................. 31 Tables Table 1. Registered and Filing Nonprofit Organizations by Organization Type.............................3 Table 2. Nonprofit Employment by Industry................................................................................4 Table 3. Employment in the Charitable Nonprofit Sector .............................................................6 Table 4. Charitable Organizations by Group: Revenue & Assets ................................................ 10 Table 5. Total Revenue and Assets by Nonprofit Type ............................................................... 12 Table 6. Employment by Industrial Sector, 2005........................................................................ 14 Table 7. Contribution to GDP by Industry.................................................................................. 14 Table 8. Distribution of Employment by Establishment, 2008.................................................... 15 Table 9. Percentage Change in Real Revenue, 1995 - 2005 ........................................................ 21 Table 10. Giving and Household Income, 2004 ......................................................................... 27 Table 11. Share of Revenue from Government Grants, 2005...................................................... 28 Table 12. Changes in Giving by Source, 2007-2008................................................................... 32 Table 13. Changes in Giving by Recipient, 2007-2008............................................................... 32 Congressional Research Service An Overview of the Nonprofit and Charitable Sector Table 14. Tax Expenditures and the Nonprofit Sector, FY2009 .................................................. 43 Table 15. Distribution of Charitable Giving Across Income Classes, 2005 ................................. 44 Table 16. State and Local Tax Subsidies, 2008-2009.................................................................. 46 Table A-1. Revenue by Source, 2005......................................................................................... 60 Appendixes Appendix. ................................................................................................................................. 60 Contacts Author Contact Information ...................................................................................................... 60 Acknowledgments .................................................................................................................... 60 Congressional Research Service An Overview of the Nonprofit and Charitable Sector A s this report illustrates, the nonprofit and charitable sector represents a significant, highly diverse component of the U.S. economy. Currently, there are a number of policy issues that could affect, either directly or indirectly, the structure and functioning of nonprofit and charitable organizations. President Barack Obama has turned toward the nonprofit sector while seeking solutions to social problems via the Social Innovation Fund.1 The recent economic downturn increased the demand for many of the goods and services provided by charitable organizations, while simultaneously placing the same organizations under increased financial constraints. The treatment of nonprofits in health care reform has also been a major issue, as the tax code cannot provide the same incentives to nonprofits (nonprofit health care providers and nonprofit employers providing insurance) that are available to for-profit organizations. Finally, the tax treatment of nonprofits and their contributors raises issues of efficiency, equity, and fairness. To assist policymakers in evaluating reforms that will potentially affect nonprofit and charitable organizations, this report provides a broad overview of the charitable sector. Such context and background information will help policymakers determine if the government’s current relationship with the nonprofit and charitable sector is efficient, or if there are policy changes that could lead to a better use of resources. This report begins by defining the nonprofit and charitable sector. It is especially important to understand the distinction between nonprofit and charitable organizations. While the term nonprofit tends to be used loosely in the literature, nonprofit here is used to identify the broad array of organizations with federal tax-exempt status. Charitable organizations are defined as organizations with 501(c)(3) public charity status, and are a subcategory of the broader nonprofit sector. The second section provides an overview of the charitable sector, focusing specifically on employment within the sector, as well as revenue and assets of charitable organizations. The charitable sector’s role in the broader economy is evaluated by comparing the charitable sector to other major industrial sectors. Third, the finances of charitable organizations are explored. Specifically, various revenue sources, both government and nongovernment, are examined. The amount of revenue coming from private contributions, government grants and transfers, private payments, and investment income is identified. The differences in revenue sources across charitable sectors are also analyzed. Finally, the impact of the economic downturn on revenue for charitable organizations is briefly addressed. The fourth section reviews the relationship between the charitable sector and government. To evaluate the relationship between the charitable sector and the federal government, the economic rationale for subsidizing charities is presented. After presenting the theoretical underpinnings for interaction between charities and government, direct evidence on the cost of the relationship as it presently exists is discussed. Finally, the report concludes with policy considerations and options. The policy options are framed by examining policy issues deemed important by nonprofit and charitable organizations. The possibility of increasing support through grants and subsidies, introducing an oversight 1 The White House: Office of the Press Secretary, “President Obama to Request $50 Million to Identify and Expand Effective, Innovative Nonprofits,” press release, May 5, 2009. Congressional Research Service 1 An Overview of the Nonprofit and Charitable Sector agency within the federal government, and revising the rules on itemized deductions for charitable organization are explored. The Nonprofit and Charitable Sectors2 This report analyzes data relating to the nonprofit and charitable sectors. For purposes of this report, the term “nonprofit sector” is generally intended to include all organizations with federal tax-exempt status.3 The term “charitable sector” is used to refer to one type of tax-exempt organization, specifically those organizations with 501(c)(3) public charity status. The Internal Revenue Code (IRC) describes approximately 30 types of tax-exempt organizations.4 Examples include charitable organizations, social welfare organizations, labor unions, trade associations, fraternal societies, and political organizations. The largest category, and the primary focus of this report, are the organizations described in Internal Revenue Code (IRC) Section 501(c)(3). Organizations eligible for 501(c)(3) status include charities, religious organizations, hospitals, and educational institutions.5 The entire universe of these organizations is commonly referred to as “charitable organizations.” Every 501(c)(3) organization is classified as either a “public charity” or “private foundation.” Public charities have broad public support and tend to provide charitable services directly to the intended beneficiaries. Private foundations often are tightly controlled, receive significant portions of their funds from a small number of donors or a single source, and make grants to other organizations rather than directly carry out charitable activities. 501(c)(3) organizations are presumed to be private foundations unless they qualify for public charity status based on support and control tests. 2 Erika Lunder, Legislative Attorney, wrote this section of the report. 3 While this report generally uses the terms “tax-exempt organization” and “nonprofit organization” interchangeably, it should be noted that this might not be appropriate in other contexts. The term “tax-exempt organization” refers to organizations with federal tax-exempt status. The term “nonprofit organization” is often used simply to refer to an entity that is not intended to be a profit-making corporation. The term can be more precisely understood to mean an entity organized under the laws of a state, with its status and privileges determined under state law. Because the qualifications for nonprofit status vary among states, it is possible for the term “nonprofit organization” to be broader than, narrower than, or identical to the term “tax-exempt organization.” For a nonprofit organization to be exempt from federal income taxes, it must meet the statutory requirements found in the Internal Revenue Code and usually must file an application with the IRS. Some organizations, including small 501(c)(3) organizations and qualifying religious organizations, are exempt from the application requirement. 4 For more information on tax-exempt organizations, see CRS Report 96-264, Frequently Asked Questions About TaxExempt Organizations, by (name redacted) and CRS Report RL30877, Characteristics of and Reporting Requirements for Selected Tax-Exempt Organizations, by (name redacted). 5 IRC § 501(c)(3) describes organizations “organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition … or for the prevention of cruelty to children or animals.” Among other requirements, “no part of the net earnings of” the organization may “inure to the benefit of any private shareholder or individual.” Congressional Research Service 2 An Overview of the Nonprofit and Charitable Sector IRS Filing Requirements A primary source for some of the data contained in this report is Form 990, which is the annual information return that must be filed with the IRS by most tax-exempt organizations. Form 990 collects information about the organization’s finances, assets, and activities. For tax year 2009, public charities with gross receipts of at least $500,000 or total assets of at least $1.25 million must file the regular Form 990, while public charities with gross receipts between $25,000 and $500,000 and total assets of less than $1.25 million may file the Form 990EZ. Public charities whose gross receipts normally do not exceed $25,000 file the Form 990-N (“e-Postcard”), which only requires basic identifying information such as the names and addresses of the organization and a principal officer. Private foundations file using the Form 990PF. Churches and other qualifying religious organizations are exempt from the annual information-reporting requirements. In addition to the information return, there are other situations when tax-exempt organizations must file a tax return. For example, tax-exempt organizations are subject to tax on income from business activities unrelated to their exempt purpose. Organizations subject to this tax, known as the unrelated business income tax (UBIT), must file a tax return using the Form 990-T. Additionally, tax-exempt organizations must generally pay the same employment taxes (i.e., withhold income and payroll taxes of their employees) as for-profit employers and file the applicable returns. Finally, an organization’s activities might require it to file other returns, such as an excise tax return. Table 1 presents information on the number of nonprofit and charitable organizations as of July, 2009. Of the 1.5 million registered nonprofit organizations, nearly 64% are public charities. Nearly 8% are private foundations, while 29% are other types of nonprofits. Only 52% of registered charities file Form 990. Non-filers include qualifying religious organizations, small organizations, and organizations that may no longer exist but have not been removed from the IRS Business Master File (BMF). Very little information is available regarding non-filing organizations. Table 1. Registered and Filing Nonprofit Organizations by Organization Type Number of Registered Organizations Share of Total Registered Organizations Number of Organizations Filing Form 990 Share of Total Filing Organizations Public charity 986,553 63.5% 512,689 58.6% Private foundation 115,958 7.5% 86,591 9.9% Other nonprofit 450,151 29.0% 275,420 31.5% Unknown 1,615 0.1% 894 0.1% Source: IRS Business Master File (BMF) (July 2009), Urban Institute National Center for Charitable Statistics (NCCS) Notes: Registered organizations are those registered as having tax-exempt status with the IRS. Filing organizations are those that filed Form 990 (including 990EZ and 990PF) within 24 months of the July 2009 release date, as reported in NCCS Core Files and IRS Business Master Files. Congressional Research Service 3 An Overview of the Nonprofit and Charitable Sector Size and Scope of the Nonprofit and Charitable Sectors Employment Measuring employment in the nonprofit and charitable sector is not an easy task. There is no government agency that regularly collects systematic employment data on the nonprofit sector.6 There are two major studies that have attempted to measure employment in the nonprofit and charitable sector in recent years. Their results are presented in Table 2 and Table 3 below. The first is employment in the nonprofit sector. In 2005, the estimated total employment in the nonprofit sector was 12.9 million. The second is employment in the charitable sector. The estimated number of paid workers employed by charities in 2004 was 9.4 million. At the end of 2004, there were 132.5 million employees nationwide. 7 Nearly 10% of America’s workforce works in the nonprofit sector, with more than 7% of the workforce employed by charities. Table 2 provides estimates of nonprofit employment by industry. More than half of nonprofit employment (approximately 54%) is involved in health care and social assistance. In 1998, nearly 23% of nonprofit employees were involved in other services. This proportion fell by 2005 to just over 21%. In both 1998 and 2005, approximately 18% of nonprofit employees provided educational services. Arts, entertainment, and recreation was the fourth largest category, with nearly 4% of all nonprofit employment within this category. Table 2. Nonprofit Employment by Industry NAICS Code Industry 1998 1998 Share 2005 2005 Share % Change 1998 - 2005 11 Agriculture, forestry, fishing, and hunting 11,900 0.1% 12,211 0.1% 2.61% 22 Utilities 4,131 0.0% 6,875 0.1% 66.42% Transportation and warehousing 1,272 0.0% 1,833 0.0% 44.10% 51 Information 32,354 0.3% 36,602 0.3% 13.13% 52 Finance and insurance 72,829 0.7% 86,548 0.7% 18.84% 53 Real estate and rental and leasing 2,986 0.0% 2,910 0.0% -2.55% 54 Professional, scientific, and technical services 119,255 1.1% 167,560 1.3% 40.51% 56 Administrative and waste management services 25,311 0.2% 21,476 0.2% -15.15% 61 Educational services 1,972,039 17.8% 2,335,466 18.1% 18.43% 48, 49 6 Organizations are required to provide some employment data on the Form 990. This data is collected at the organization level, rather than establishment level, making it difficult to make geographic distinctions for nonprofit and charitable workers. Further, a number of organizations fail to report their number of employees. The data is selfreported by the organization and may contain errors. 7 Total nonfarm payroll for all employees is collected by the U.S. Department of Labor: Bureau of Labor Statistics. Congressional Research Service 4 An Overview of the Nonprofit and Charitable Sector NAICS Code Industry 1998 1998 Share 2005 2005 Share % Change 1998 - 2005 62 Health care and social assistance 5,941,902 53.5% 6,999,312 54.2% 17.80% 71 Arts, entertainment, and recreation 403,242 3.6% 481,755 3.7% 19.47% 72 Accommodation and food services 12,730 0.1% 17,902 0.1% 40.63% 81 Other services, except government 2,500,681 22.5% 2,751,202 21.3% 10.02% Total 11,100,632 12,921,652 16.40% Source: Estimated employment levels are from Kennard T. Wing, Thomas H. Pollak, and Amy Blackwood, The Nonprofit Almanac 2008 (Washington, DC: The Urban Institute Press, 2008). Notes: The employment levels here were estimated using data from the 2002 Economic Census conducted by the U.S. Census Bureau, the U.S. Department of Commerce, Bureau of Economic Analysis, National Income and Product Accounts from 2007, the U.S. Department of Labor, Bureau of Labor Statistics, Quarterly Census of Employment and Wages spanning 1998 through 2007, the Urban Institute’s National Center for Charitable Statistics Core Files from 1998 through 2006, and the IRS Statistics of Income Form 990 and 990-EZ Sample Files from 1998 through 2006. The NAICS Code is the North American Industrial Classification System. Shares may not sum to 100% due to rounding. Between 1998 and 2005, employment in the nonprofit sector grew by an estimated 16.4%. Overall, nationwide growth in employment was approximately 6.2%.8 While the utilities; transportation and warehousing; accommodation and food services; and professional, scientific, and technical services sectors experienced the most growth between 1998 and 2005, each of these four sectors still represents less than 1% (1.3% for the professional, scientific, and technical services) of total nonprofit employment. The first and third largest sectors in terms of nonprofit employment—health care and social assistance and education services, respectively— experienced increases in employment that exceeded employment increases for the nonprofit sector as a whole. The second employment estimate is that of the number of persons employed by the charitable sector. Table 3 presents 2004 estimates of employment by charities across various sectors. 8 CRS calculations based on total nonfarm payroll for all employees, U.S. Department of Labor: Bureau of Labor Statistics. Congressional Research Service 5 An Overview of the Nonprofit and Charitable Sector Table 3. Employment in the Charitable Nonprofit Sector NAICS Code Industry 2004 Share of Charitable Employment 51 Information 71,000 0.8% 52-53 Finance, insurance, and real estate 76,000 0.8% 54 Professional, scientific, and technical services 250,000 2.7% 61 Educational services 1,373,000 14.6% 62 Health care and social assistance 6,518,000 69.5% 71 Arts, entertainment, and recreation 243,000 2.6% 81 Other services, except government 695,000 7.4% Total 9,385,000 Source: Lester M. Salamon and S. Wojciech Sokolowski, Employment in America’s Charities: A Profile, The Johns Hopkins Center for Civil Society Studies, Nonprofit Employment Bulletin Number 26, December 2006. Notes: Note that the total is not the sum of individual fields. This is attributable to data disclosure limitations. These estimates were made using data from the U.S. Bureau of Labor Statistics’ Quarterly Census of Employment and Wages (QCEW). Since many states only require nonprofit organizations with at least four employees to respond to the QCEW, the numbers reported here likely understate total employment in the charitable sector. The data report employment from the second quarter of 2004. Shares may not sum to 100% due to rounding. Generally, the estimates of employment in the charitable sector are consistent with estimates for total employment by nonprofits.9 Since charities are a subset of nonprofits, it is expected that there would be fewer persons employed by charities as compared to nonprofits. Figure 1 depicts regional variation with respect to the percentage of the workforce employed by the charitable sector. In relative terms, the northeast tends to see a larger proportion of its workforce employed by the charitable sector. The District of Columbia has the largest proportion of workers employed by the charitable sector, with 16.3%. In Rhode Island, 13.6% of workers are employed by a charitable organization. New York ranks third when ranking states by employment in the charitable sector, with 13.3%. Relative to other parts of the country, fewer persons are employed by the charitable sector in the south. In addition to paid workers, volunteer workers make up a significant portion of the labor involved in providing charitable goods and services. In 2004, there were an additional 4.7 million full-time equivalent (FTE) volunteer workers employed by charitable institutions.10 Figure 2 depicts FTE volunteers as a percentage of total employment in each state. While states in the northeast tend to have a larger proportion of workers employed in the charitable sector, a similar pattern does not appear for volunteers as a share of total employment. In fact, there is very little (if any) relationship between the proportion of workers employed by the charitable sector and volunteers relative to total employment. 9 Kennard T. Wing, Thomas H. Pollak, and Amy Blackwood, The Nonprofit Almanac 2008 (Washington, DC: The Urban Institute Press, 2008) explicitly discusses the methodologies used for estimating employment in the nonprofit sector. 10 Salamon and Sokolowski, Employment in America’s Charities: A Profile, The Johns Hopkins Center for Civil Society Studies, Nonprofit Employment Bulletin Number 26, December 2006. Congressional Research Service 6 Figure 1. Share of Workers in Each State Employed by the Charitable Sector, 2004 Source: CRS calculations based on data from Salamon and Sokolowski (2006). Percentage of paid workers employed by the charitable sector in 2004. CRS-7 Figure 2. Full-Time Equivalent Volunteers as Percent of Workforce, 2004 Source: CRS calculations based on data from Salamon and Sokolowski (2006). Percentage of full-time equivalent volunteer workers employed by the charitable sector in 2004. CRS-8 An Overview of the Nonprofit and Charitable Sector Revenue Table 4 reports the revenue of 501(c)(3) public charities reporting as of July 2009. For charities filing Form 990, total revenues for 2009 are $1.40 trillion. Revenue information is provided by 512,889 public charities filing Form 990 with the IRS. The revenue raised differs significantly across sectors. For example, nonprofit hospitals that are charitable organizations are less than 1% of all filing organizations. Yet amongst revenues for filing charitable organizations, 41% is reported by hospitals. More than 29% of assets held by filing charitable organizations are held by hospitals. Charitable hospitals receive the largest share of revenue. Other health-orientated charitable organizations are also responsible for a relatively large share of revenue flowing into the charitable sector, more than 15%. Given that 9.6% of filing organizations are health organizations, the fact that these organizations bring in 15% of revenue is closer to being proportional. The higher-education sector, like the hospital sector, generates a highly disproportionate level of revenue and holds a disproportionate quantity of assets. While only 0.5% of charities are highereducation organizations, higher-education organizations generate more than 11% of revenue flowing to charitable organizations and hold more than 21% of the charitable sector’s assets. These data suggest that while higher-education and hospital charitable organizations are relatively few in number, they are a very large part of the charitable sector in terms of revenue and assets. Charitable organizations focusing on providing goods and services in the realm of arts, culture, and humanities tend to have below-average revenue. While more than 12% of charitable organizations filing Form 990 are in the arts, culture, and humanities category, the sector only generates 2.3% of total revenue flowing into the charitable sector. In terms of revenue, arts, culture, and humanities charities are markedly smaller than health and education charitable organizations. Charitable organizations with a focus on the environment, human services, and the public benefit also tend to be smaller, as evidenced by the fact that these sectors represent a larger share in the number of organizations than the sectors’ share in revenue generation or asset holdings. The data in Table 4 also highlight the limited amount of information reported by religious charitable organizations. While 22.6% of registered charitable organizations are religious organizations, only 6.5% of organizations filing 990 are religious charities. Since religious organizations are not required to file Form 990, very little is known about the revenue generated and assets held by religious charities. Congressional Research Service 9 Table 4. Charitable Organizations by Group: Revenue & Assets (billions of dollars) NTEE Group # of Registered Organizations # of Organizations Filing 990 Total Revenue Total Assets Arts, Culture, and Humanities 99,263 10.06% 64,347 12.55% 32.67 2.34% 100.39 3.86% Education 149,411 15.14% 91,113 17.76% 97.84 6.99% 303.68 11.68% Higher Education 4,177 0.42% 2,378 0.46% 158.94 11.36% 551.22 21.21% Environment 45,882 4.65% 24,924 4.86% 13.73 0.98% 33.05 1.27% Health 72,410 7.34% 49,357 9.62% 216.16 15.45% 256.06 9.85% Hospitals 6,384 0.65% 4,822 0.94% 577.06 41.25% 757.08 29.13% Human Services 261,984 26.54% 163,885 31.95% 175.50 12.55% 268.79 10.34% International, Foreign Affairs, and National Security 14,781 1.50% 9,361 1.83% 30.80 2.20% 31.65 1.22% Public and Societal Benefit 107,946 10.94% 65,835 12.84% 81.33 5.81% 254.61 9.80% Religion Related, Spiritual Development 213,574 21.64% 33,110 6.46% 12.14 0.87% 26.68 1.03% Mutual/Membership Benefit Organizations, Other 2,521 0.26% 1,617 0.32% 2.49 0.18% 15.07 0.58% Unknown 8,700 0.88% 2,140 0.42% 0.30 0.02% 0.64 0.02% Total 987,033 100.00% 512,889 100.00% 1,398.95 100.00% 2,598.92 100.00% Source: The Urban Institute, National Center for Charitable Statistics, http://nccsdataweb.urban.org/ and Internal Revenue Service, Exempt Organizations Business Master File (July 2009). Notes: Revenue and assets are for organizations that filed Form 990 or Form 990EZ within 24 months of the July 2009 Business Master File release date. Organizations are grouped according to the National Taxonomy for Exempt Entities (NTEE), a system for categorizing the activities of nonprofit organizations established by the National Center on Charitable Statistics. Registered organizations are those appearing in the Business Master File. Revenue and assets are for filing organizations only. CRS-10 An Overview of the Nonprofit and Charitable Sector Assets Table 4 also reports total assets across different types of public charities. Charities reporting as of July 2009 held $2.6 trillion worth of assets. These assets are held by the 512,899 public charities filing Form 990. As was seen with respect to revenue, asset holding patterns vary across charitable sectors. Charities in the education sector stand out when examining asset holdings. Specifically, education charities hold nearly 33% of assets held by charitable institutions, while only 18% of charitable organizations filing Form 990 are in the education sector. Relative to other types of charities, education charities hold more assets. This observation is driven by asset holdings of highereducation institutions, and the large asset holdings in the endowments of some of these institutions. Health-related charities also hold a disproportionate volume of assets relative to the number of organizations in the health sector, while charities in the human services and housing sectors hold a share of assets that is less than their share of filing organizations. Specifically, health charities hold nearly 36% of assets while only 5.5% of charitable organization filing Form 990 are in the health sector. More than 10% of charities filing Form 990 are in the human services sector, yet the human services sector holds less than 6% of charitable organizations’ assets. Housing charities are another sector where the share of assets held is relatively low. Nearly 4% of all charitable organizations filing Form 990 are in the housing sector yet the housing sector only holds 2.5% of all charitable organizations’ assets. One important point to note when examining the revenue and asset data presented in Table 4 is that there is no adjustment or control for charity size. Revenue and assets for the health and education sectors are relatively high, reflecting in part their tendency to be larger than other types of charities. Health charities, for example, averaged $26.5 million in revenue and $33.3 million in assets. Arts, culture, and humanities organizations are much smaller, with the average institution in this sector generating $0.5 million in revenue and holding $1.6 million in assets. Charitable sectors that tend to have organizations smaller in size hold a lesser share of the charitable sectors’ total revenue and assets. Revenue and Assets in the Broader Nonprofit Sector Table 5 contains information on the assets and revenue for public charities relative to private foundations and other nonprofits. While public charities represent approximately 59% of nonprofit organizations filing Form 990, charities bring in 71% of revenue, a disproportionately large share. Nearly 10% of nonprofit organizations filing Form 990 are private foundations. Private foundations hold a disproportionate amount of assets, with nearly 15% of nonprofit assets held by foundations. While nearly 32% of nonprofits are neither charities nor foundations, less than 20% of revenue and 24% of assets are held by these other nonprofits. Congressional Research Service 11 An Overview of the Nonprofit and Charitable Sector Table 5.Total Revenue and Assets by Nonprofit Type (billions of dollars) Share of Total Filing Organizations Total Revenue Reported on Form 990 512,689 58.6% Private foundation 86,591 Other nonprofit Share of Total Revenue Total Assets Reported on Form 990 Share of Total Assets $1,397 71.1% $2,598 61.3% 9.9% $181 9.2% $621 14.7% 275,420 31.5% $386 19.7% $1,014 23.9% 894 0.1% $1 0.1% $2 0.1% 875,594 100% $1,966 100% $4,236 100% Number of Organizations Filing Form 990 Public charity Unknown Total Source: IRS Business Master File (BMF) (July 2009), Urban Institute National Center for Charitable Statistics (NCCS). Notes: Filing organizations are those that filed Form 990 (including 990EZ and 990PF) within 24 months of the July 2009 release date, as reported in NCCS Core Files and IRS Business Master Files. Columns may not sum due to rounding. Contribution of Charities to GDP To evaluate the contribution of nonprofits and charitable organization to total output, data from the agency charged with measuring the size of the U.S. economy, the Bureau of Economic Analysis of the Department of Commerce (BEA), is utilized. As illustrated in Figure 3, in 2008 nonprofit institutions serving households (NPISH) were responsible for generating 5.2% of U.S. GDP, or $751.2 billion worth of output.11 The share increased 0.4 percentage points between 1998 and 2008.12 Nonprofits’ share of output consists of wages paid to nonprofit employees, the rental value of assets owned and used by nonprofits while providing services, and rental income from tenant-occupied housing owned by nonprofits. 11 Nonprofit institutions serving households (NPISH) are tax-exempt organizations that provide services in one of the following five areas: (1) religion and welfare, including social services, grant-making foundations, political organizations, museums and libraries, and some civic and fraternal organizations; (2) medical care; (3) educational and research institutions; (4) recreation, including cultural and athletic organizations; and (5) personal business, including labor unions, legal aid, and professional associations. See Charles Ian Mead, Clinton P. McCully, and Marshall B. Reinsdorf, Income and Outlays of Households and of Nonprofit Institutions Serving Households, Bureau of Economic Analysis, April 2003, http://www.bea.gov/scb/pdf/2003/04april/0403household.pdf. 12 Examination of the data underlying Figure 3 supports the finding that the increase in NPISH’s share of GDP is representative of a trend rather than an anomaly. Congressional Research Service 12 An Overview of the Nonprofit and Charitable Sector Figure 3. Nonprofit Institutions Serving Households’ Share of GDP Source: CRS calculations based on U.S. Department of Commerce, Bureau of Economic Analysis, National Income and Product Accounts Tables, Table 1.3.5. Notes: Shares determined using Gross Value Added by Sector. While the Bureau of Economic Analysis’s data provide the best representation of the nonprofit sector’s share in the economy, some care should be taken in interpretation. First, the NPISH classification represents a subset of all nonprofits, and therefore represents a share of economic activity smaller than that of the entire nonprofit sector. The NPISH classification also is not synonymous with what is typically thought of as the charitable sector 501(c)(3) organizations. Social welfare organizations and labor unions, for example, may be included in the BEA’s NPISH category but are not 501(c)(3) charitable organizations. On the other hand, some 501(c)(3) organizations may not fall within the NPISH classification, such as those that sell goods or services in a manner similar to businesses. Overall, it is likely that the NPSIH’s share in GDP is greater than that of the charitable sector, but less than that of the nonprofit sector. Other cautions include the fact that there are difficulties in placing a value on much of the output of charitable organizations. Since pricing the value of charitable output is difficult, the BEA estimates the value of output by using the cost of the inputs. Determining the cost of inputs, however, presents its own set of problems. Employee wages are the largest component of charitable organizations’ costs. As was noted above, the data on the number of employees in the charitable sector are not precise. A final issue is the fact that the BEA’s method for measuring the nonprofit sector’s output only includes measurable costs of inputs. However, many nonprofit and charitable organizations are supported via volunteer efforts. Since these efforts do not represent a cost they are not included in the measure of output. The Nonprofit & Charitable Sectors vs. Other Major Economic Sectors To compare the size of the nonprofit sector to other major economic sectors, employment levels are examined. As was noted above, there were nearly 13 million nonprofit employees in 2005, and an estimated 9.4 million employees in the charitable sector in 2004. Table 6 presents Congressional Research Service 13 An Overview of the Nonprofit and Charitable Sector employment in selected industries in 2005.13 In terms of employment, the charitable sector is larger than the construction sector. The charitable sector is also larger than the finance and insurance, and real estate sectors combined when size is measured by employment. The charitable sector has nearly half as many employees as the government, where the government includes all federal, state, and local government employees. Table 6. Employment by Industrial Sector, 2005 (thousands) 2005 Employment Industrial Sector Construction 7,353 Manufacturing 13,954 Retail Trade 13,467 Finance and Insurance 5,829 Real estate and rental and leasing 2,004 Educational Services 2,543 Health care and social assistance 13,258 Government 19,872 Source: Bureau of Economic Analysis, Table 6.5D, Full-Time Equivalent Employment by Industry. Notes: The government sector includes federal government employees, both civilian and military. The government sector also includes state and local government employment, including those involved in providing education. Table 7 provides the contributions of various economic sectors to GDP. As was illustrated in Figure 3, nonprofit institutions serving households (NPISHs) represented 5.2% of GDP, or $751.2 billion in 2008. In terms of contribution to GDP, NPISHs are a larger part of the economy than the construction sector and the educational services sector. 14 NPISHs contribute nearly half as much to GDP as the manufacturing sector. Table 7. Contribution to GDP by Industry (billions of dollars) Industrial Sector Value Added Share of GDP (%) Construction 581.5 4.1 Manufacturing 1,637.7 11.5 Retail trade 885.5 6.2 Finance and insurance 1,064.9 7.5 Real estate and rental and leasing 1,783.5 12.5 13 The nonprofit or charitable sector and the industrial sectors listed in Table 6 are not mutually exclusive. For example, the educational services and health care and social assistance sectors have many employees that are also counted as being employed in the charitable sector. 14 This does not include education provided by state and local governments. Congressional Research Service 14 An Overview of the Nonprofit and Charitable Sector Industrial Sector Value Added Share of GDP (%) Educational services 138.3 1.0 Health care and social assistance 1,019.7 7.2 Government 1,840.0 12.9 Source: Bureau of Economic Analysis, Gross Domestic Product by Industry Accounts, Value Added by Industry, 2008. Drawing conclusions regarding the importance of the charitable sector in the economy depends critically on what is being measured. When looking at employment figures, the charitable sector appears to be larger than the construction, manufacturing, finance and insurance, real estate and rental and leasing, and educational services sectors. However, only the construction and educational services sectors had contributions to GDP below the contributions of NPISHs in 2008. Further, direct comparison of the data presented on the nonprofit and charitable sectors’ employment to NPISHs contribution to GDP is not appropriate since NPISHs, by definition, are not all charitable organizations nor all nonprofit organizations. To gain further perspective on the relative size of nonprofit organizations, Table 8 compares the distribution of employees at the establishment level of nonprofit firms to establishments in the financial services and real estate industry and to establishments across all industries. While establishment data do not provide information regarding the overall size of nonprofit firms to forprofit firms, the establishment data do allow for a couple of observations. First, relatively speaking, there are fewer very large establishments in the nonprofit sector. Only 6% of nonprofit establishments have more than 1,000 employees on site, while 14.6% of all establishments (forprofit and nonprofit) have more than 1,000 employees on site. In the financial services and real estate sector, 27.2% of establishments have 1,000 or more employees. Second, there are fewer very small establishments in the nonprofit sector than in all sectors taken together. While 52% of nonprofit establishments have less than 10 employees, 58.1% of all establishments have less than 10 employees. In the financial services and real estate sector, 51% of establishments have less than 10 employees. Nonprofit establishments are more likely than the typical establishment to be mid-sized, with more than 10 but less than 1,000 employees. Table 8. Distribution of Employment by Establishment, 2008 Distribution of Nonprofit Establishments (%) Distribution of Financial Services and Real Estate Establishments (%) Distribution of Total Establishments (%) Less than 10 52.0 51.0 58.1 10-24 13.2 6.0 12.1 25-99 12.5 5.5 8.2 100-999 16.3 10.3 8.8 Greater than 1,000 6.0 27.2 14.6 Number of Employees Source: Medical Expenditure Panel Survey, 2008. Congressional Research Service 15 An Overview of the Nonprofit and Charitable Sector How Are Charities Funded? Revenue Charities raise revenue from a variety of sources. The first source of revenue is from fees or private payments for service. The second way charities raise money is through the receipt of government grants and payments. Charities also rely on funding via private contributions (from individuals, corporations, bequests, and foundations). Finally, charities are able to raise revenue by earning returns on investments as well as through some other revenue sources. Figure 4 illustrates how much total revenue was raised in 2005 from each of these revenue sources. Overall, charitable organizations raised $1.2 trillion in revenue in 2005. Private payments for service are the largest category of revenue for charitable organizations. Private payments for service may include a wide variety of services, such as payments for medical care and education tuition. In 2005, charities collected $590 billion in payments for services. Payments for services constituted 49% of total revenue in 2005. Government grants and payments represent the second largest revenue source for charitable organizations. In 2005, $351 billion worth of government grants and payments were made to charities, or 29% of total revenue. While it appears from this measure that the government plays only a moderate role in financing charitable organizations, it is important to remember that the government subsidizes the activities of charitable organizations in other ways. For example, charities receive various tax benefits, such as exemption from federal income tax, eligibility to receive tax-deductable donations, and the ability to issue tax exempt bonds, 15 in addition to indirect benefits that may arise from undertaking activities encouraged by other incentives in the tax code.16 This report provides further detail on the government’s relationship with the nonprofit and charitable sector below. 15 Large nonprofit institutions, such as hospitals and educational institutions, have long used tax-exempt bonds to finance capital improvements. Recently, more smaller nonprofit organizations have taken advantage of the ability to issue tax-exempt debt to finance capital costs. For examples, see Steven Rathgeb Smith, “Government Financing of Nonprofit Activity,” in Nonprofits & Government, ed. Elizabeth T. Boris and C. Eugene Steuerle, 2nd ed. (Washington, DC: Urban Institute Press, 2006), pp. 219-256. 16 There are indirect relationships between other elements of the tax code and the provision of goods and services by charitable organizations. It has been argued that both the child and dependent care credit and the Low-Income Housing Tax Credit (LIHTC) make services provided by nonprofit organizations more profitable, therefore increasing the demand for such services. See Steven Rathgeb Smith, “Government Financing of Nonprofit Activity,” in Nonprofits & Government, ed. Elizabeth T. Boris and C. Eugene Steuerle, 2nd ed. (Washington , DC: Urban Institute Press, 2006), pp. 219-256. Congressional Research Service 16 An Overview of the Nonprofit and Charitable Sector Figure 4. Revenue by Source, 2005 (billions of dollars) Source: Wing, Pollak, and Blackwood, The Nonprofit Almanac, 2008, p. 134 and CRS calculations. Notes: CRS calculations based on data provided by the National Center on Charitable Statistics based on data from the Internal Revenue Service, Statistics of Income Division Exempt Organizations Sample Files, public charities only. This sample is derived from organizations filing Form 990 and thus does not include small organizations or religious charities. Private contributions in 2005 were $143.77 billion, or 12% of overall revenue to charitable organizations. There is substantial attention given to this revenue source, as it is believed that private contributions to charities are likely to fluctuate in response to changes in economic conditions and the tax treatment of contributions. These issues are explored in greater detail below. Charitable organizations made $81 billion from investments in 2005, which represents 7% of their overall revenue. Investment income includes the sales of securities, interest, and dividends. The recent recession has likely decreased revenue flowing into charitable organizations from investment income. For example, university endowments lost 23% on average between July 1, 2008, and November 30, 2008.17 Other revenue, of which there were $30 billion in 2005, make up 3% of overall revenue received by charitable organizations. These revenue come from revenue sources such as membership dues, net special events income, and other miscellaneous revenue-raising activities. 17 John Hechinger, “College Endowments Plunge,” The Wall Street Journal, January 27, 2009, p. D3. Congressional Research Service 17 An Overview of the Nonprofit and Charitable Sector Revenue Sources by Charitable Sector Charitable organizations are highly heterogeneous. One aspect of heterogeneity is charitable organizations’ revenue sources. To explore this further, Figure 5 examines the distribution of revenue sources across different types of charities. The data used to derive Figure 5 is available in Table A-1. While the reliance of different types of charities on various revenue sources varies along a number of dimensions, there are a few patterns of particular interest. First, it is clear from the chart that charities providing education and health care receive the majority of their revenue from private payments for service. These fee-for-service organizations are much less reliant on private contributions than other types of charities. It is also important to note that for hospitals, the government grants and payments category includes government payments via Medicare and Medicaid. The charts in Figure 5 also show that arts, culture, and humanities and environment and animals charities rely most heavily on private contributions. 18 Charities that rely heavily on private contributions are more susceptible to economic fluctuations and changes in the tax code that would affect individual giving. These issues are discussed further below. The charitable sector that is most reliant on investment income is education. Nearly 17% of the charitable education sector’s revenue in 2005 were generated from investments. For higher education institutions, this figure was over 19%. As noted above, university endowments suffered substantial losses in 2008. Revenue for educational institutions are more susceptible to fluctuations in markets likely to impact investment income than other types of charitable organizations. Overall, understanding what types of charitable organizations have a greater reliance on specific sources of revenue may help policymakers understand the potential for external economic conditions to impact the well-being of the charitable sector. Educational institutions, with a greater reliance in investment income, are more likely to be adversely affected directly by the downturn of financial markets.19 Charities where a larger proportion of revenue come from private contributions, such as arts, culture, and humanities and environment and animals, are more likely to be impacted by changes apt to cause fluctuations in private giving, such as changes to the tax code. Charities that derive the majority of their revenue from private payments, such as health care and education institutions, are less likely to suffer revenue losses when external factors cause changes to the level of private giving. 18 Charities classified as international receive the vast majority, 72%, of their funds from private contributions. Private donations may also be expected to decline when financial markets falter as potential donors’ loss of wealth corresponds to reduced giving. 19 Congressional Research Service 18 Figure 5. Comparing Revenue Sources Across Charitable Sectors (2005 share of total revenue) Source: CRS calculations using data published by Wing, Pollak, and Blackwood, The Nonprofit Almanac, 2008, p. 134. Notes: Data is from the National Center on Charitable Statistics based on U.S. Internal Revenue Service, Statistics of Income Division, Exempt Organizations Sample Files, public charities only. CRS-19 An Overview of the Nonprofit and Charitable Sector Growth in Revenue Sources Table 9 shows the percentage change in real revenue between 1995 and 2005 delineated by charitable sector. Total revenue received by charitable institutions grew by 68.6% over this time period. Private payments to charitable organizations grew more during the time period than other revenue sources. Much of this increase appears to be driven by the increase in private payments received by hospitals. The portion of the charitable sector involved in health care receives the majority of their revenue from private payments. Private payments in the health care sector have also grown faster than private payments in any other sector. As the revenue demands for health care charities generally have increased, these charities have seen a greater increase in private payments than in other revenue sources. In fact, between 1995 and 2005, the portion of revenue from private payments declined in real terms for charitable health care organizations (although this figure still increased for hospitals). Some charitable sectors have experienced much larger growth in revenue with respect to private contributions than others. Overall, private contributions to charitable sectors increased nearly 69% between 1995 and 2005. However, charities involved with the environment and animals, human services, and international issues all experienced growth in revenue from private contributions in excess of 100% during that time period. It is also noteworthy that growth in investment income between 1995 and 2005 was highest for charities in the education sector. Education receives a larger proportion of their revenue from investment income than most other charitable sectors. This trend is driven by higher education institutions, where the growth in the share of revenue coming from investment income has been the highest in the time period observed. Again, it should be noted that the financial assets of higher education institutions did not fare well in 2008, and the growth in the revenue coming from investment income has likely slowed. Finally, the charitable sectors that have seen the largest growth in revenue overall are relatively small. Between 1995 and 2005 the revenue flowing into the international charitable sector increased by 190%. The international sector, however, still earned less than 1.7% of the charitable sector’s total revenue. The environmental charitable sector’s revenue also increased more than average, 90% between 1995 and 2005. Even in the face of this rapid growth, the environmental charitable sector captures less than 1% of charitable organizations’ total revenue. Congressional Research Service 20 An Overview of the Nonprofit and Charitable Sector Table 9. Percentage Change in Real Revenue, 1995 - 2005 Private Private Contributions Payments Government Grants and Investment Other Payments Income Revenue Total Arts, culture, and humanities 91.36 53.40 59.51 28.86 53.85 65.32 Education 59.07 62.01 70.50 76.10 44.36 64.40 Higher education 41.75 60.54 62.93 89.00 52.88 63.00 Other education 116.15 68.58 95.50 10.47 25.00 70.20 Environment and animals 136.73 78.29 114.55 51.06 3.66 90.18 Health care -19.26 105.85 48.43 60.37 66.62 72.83 Hospitals 88.86 112.42 43.60 55.54 102.06 76.48 Other health services -46.15 89.17 80.47 76.03 -2.24 61.54 Human services 102.33 88.85 41.97 25.27 57.99 67.03 International 302.45 83.93 71.70 66.67 -28.57 190.62 Other operating public charities 44.39 81.37 166.37 -21.23 7.84 65.89 Supporting public charities 96.77 -20.76 100.46 66.93 13.98 41.32 Total 68.89 83.27 52.73 56.93 44.82 68.60 Source: CRS calculations based on data from Wing, Pollak, and Blackwood, The Nonprofit Almanac, 2008, p. 134137. Notes: Revenue are adjusted to constant dollars prior to calculating the percentage change. The percentage change is the change in revenue over the 1995 to 2005 time period. Nongovernmental Financing: Private Contributions Private contributions to charitable organizations come from four different sources. The first is gifts from individuals. In 2008, individuals gave $229.28 billion.20 The second is charitable bequests, or gifts from estates. In 2008, total bequests were valued at $22.66 billion.21 The third source of giving comes from corporations. Corporations gave $14.50 billion in 2008.22 Finally, grants to charitable organizations are made by foundations. In 2008, it is estimated that foundations gave $41.21 billion. Total giving by all four groups was $307.65 billion in 2008. Total giving in 2008 was 2% less (5.7% less after adjusting for inflation) than total giving in 2007. This is the first decline in giving since 1987. Figure 6 shows giving by individuals, bequests, corporations, and foundations in real terms in 1998, 2007, and 2008. Between 2007 and 20 The Center on Philanthropy at Indiana University, Giving USA 2009 (Indianapolis, IN: Giving USA Foundation, 2009), p. 210. This figure includes estimated charitable deductions on 2008 tax returns as well as an estimate of charitable giving by those who do not itemize deductions on taxes. This figure exceeds that reported above for private contributions because it includes giving to small organizations and churches, of which neither are required to file Form 990. 21 Charitable bequests include both those reported on 2008 estate tax returns and those given by estates not subject to the estate tax. 22 Corporate giving, as calculated by The Center on Philanthropy at Indiana University, Giving USA 2009, includes grants made by corporate foundations to charities but does not count giving by corporations to foundations. Congressional Research Service 21 An Overview of the Nonprofit and Charitable Sector 2008, giving by individuals and from bequests both fell by more than 6% (in real terms). Giving by corporations fell by 8% (in real terms). Giving from foundations remained relatively constant, falling by less than 1% (in real terms). Despite the recent reduction in the amount of contributions charities receive from gifts, charitable organizations still received more in 2008 than they did a decade earlier. In real terms, gifts from individuals increased by 25% between 1998 and 2008, bequests increased 32%, corporate giving increased 30%, and gifts from foundations increased by 83%. While real giving has increased, looking at giving relative to the size of the overall economy provides a better picture of society’s generosity. To evaluate the generosity of society over time the ratio of charitable giving to GDP is examined. Figure 7 plots giving as a percentage of GDP and disaggregates giving across sources. Giving as a percentage of GDP was greater than 2% into the 1970s. From the early 1970s through the late 1990s giving as a percentage of GDP remained below 2%. In the late 1990s, giving as a percentage of GDP began to increase, reaching a peak of 2.37% of GDP in 2005. Since 2005, giving as a percentage of GDP has fallen. In 2008, giving as a percentage of GDP was 2.16%. The increase in giving as a percentage of GDP between the 1990s and 2000s was driven primarily by giving from individuals and giving from foundations. Prior to the late 1990s, giving by individuals was less than 1.5% of GDP. Since 1999, giving as a percentage of GDP by individuals has not fallen below 1.6%. In 2008, giving as a percentage of GDP by individuals was 1.61%, down from its peak of 1.78% in 2005. Throughout the 1980s and most of the 1990s giving by foundations never exceeded 0.15% of GDP. In 2008, this ratio was 0.29%. Giving as a percentage of GDP by foundations increased between 2007 and 2008. Overall, giving as a percentage of GDP by foundations has nearly tripled since the 1970s. Congressional Research Service 22 An Overview of the Nonprofit and Charitable Sector Figure 6. Charitable Giving Source: CRS calculations based on data from The Center on Philanthropy at Indiana University, Giving USA 2009, pp. 210-211. Notes: Giving by individuals, bequests, corporations, and foundations is presented in 2008 dollars. Real values were calculated using the CPI-U. Giving relative to GDP by bequests and corporations does not exhibit such clear patterns. Corporate giving as a percentage of GDP in 2008 was 0.10%. Relative to GDP, corporate giving in 2008 was the same as it was throughout most of the 1990s. Corporate giving relative to GDP was lower (0.07% - 0.08%) in the 1970s and higher (0.12% - 0.13%) in 2005 and 2006. Bequests relative to GDP were 0.16% in 2008, lower than they were in the early 2000s (when the ratio was 0.20%). Compared to the 1970s and 1980s, bequests as a percentage of GDP are still 0.03 – 0.06 percentage points higher. To more fully understand the impact of giving on the charitable sector, it is important to address what types of charities receive gifts. Figure 5 illustrates that the largest source of funding for arts, culture, and humanities as well as for environment and animals charities is private donations. Both of these types of charitable organizations received more than 40% of their revenue from private donations in 2005.23 23 The data presented in the revenues section is for charitable organizations filing Form 990. Therefore, these data do not include small organizations or churches. The data in this section are for all charitable gifts and do include donations given to charitable religious organizations. Congressional Research Service 23 Figure 7. Giving as a Percentage of GDP, 1967-2008 Source: CRS calculations based on data from The Center on Philanthropy at Indiana University, Giving USA 2009, pp. 210-211. CRS-24 An Overview of the Nonprofit and Charitable Sector Figure 8 plots giving to different types of charitable organizations in 2008, 2007, and 1998. When looking at data from the giving perspective, it is clear that religious organizations are the recipients of the largest share of gifts. Further, religious organizations were one of the few categories to experience an increase in giving between 2007 and 2008. Overall, giving fell by 5.7% between 2007 and 2008, with the largest declines in gifts to grantmaking foundations (22%); human services (-16%); and arts, culture, and humanities (-9%). Between 1998 and 2008 overall giving increased by nearly 32% in real terms. Again, there was wide variation across sectors. The sectors that experienced the largest increases in giving over the course of the decade were international affairs (98%), environment and animals (42%), and education (30%). 24 Giving to religion grew over the course of the decade, but the rate of growth was relatively low (19%). Giving to arts, culture, and humanities decreased by 2% between 1998 and 2008. This is particularly noteworthy since the arts, culture, and humanities charitable sector receives the largest share of revenue from private contributions. There are a number of issues which may affect giving by individuals. These include whether or not individuals can deduct contributions, fluctuations in personal income, and broader economic conditions. Individuals who itemize deductions have a greater incentive to give, as the price of giving is reduced by the marginal tax rate. In 2005, those itemizing gave on average 3.54% of their adjusted gross income. Non itemizers gave on average 1.34% of their adjusted gross income. 25 It is important to note, however, that those choosing to itemize deductions tend to have higher incomes and thus perhaps a greater ability to give. Individual charitable deductions are subject to various restrictions, which include being generally limited to 50% of modified adjusted gross income. 26 24 Unallocated giving actually had the largest increase, tripling in value over the decade. Wing, Pollak, and Blackwood, The Nonprofit Almanac, 2008, p. 92. 26 Individual gifts to certain types of nonprofits and gifts of specific types of assets may be further restricted. 25 Congressional Research Service 25 Figure 8. Giving to Charities by Type Source: CRS calculations using data from The Center on Philanthropy at Indiana University, Giving USA 2009, pp. 212-215. All values are adjusted to 2008 dollars using the CPI-U. CRS-26 An Overview of the Nonprofit and Charitable Sector Individual giving to charity is also responsive to income. Table 10 shows how giving and the amounts given vary across three different income groups. In 2004, 56.3% of households with less than $50,000 in income gave to charity, 81.4% of households with income between $50,000 and $99,999 gave to charity, and 93.3% of households with income greater than $100,000 gave to charity. 27 In 2004, the average household gave just over $2,000. This figure appears to be driven by a few households making relatively large gifts as the median charitable gift was $775. The average giving for households making $100,000 or more per year was more than three times the average giving of households making less than $50,000. The median gift by households making more than $100,000 was more than four times as much as the median level of giving by households making less than $50,000 per year. Table 10. Giving and Household Income, 2004 All Income Groups < $50,000 $50,000 $99,999 $100,000 and above % of households giving 70.2% 56.3% 81.4% 93.3% Average annual amount per donor household $2,047 $1,186 $1,871 $3,886 Median annual amount per donor household $775 $450 $815 $1,830 Source: Center on Philanthropy Panel Study, 2005 Wave. Economists have also made attempts to measure the elasticity of charitable giving with respect to income, which is the percentage change in giving relative to the percentage change in income. Empirical work that has attempted to estimate the elasticity of charitable giving with respect to income has produced a wide range of results.28 While many studies have found an income elasticity of less than one, the fact that individual contributions relative to GDP have remained relatively constant over time (see Figure 7) suggests that income elasticity is more likely unit elastic. If the income elasticity were in fact less than one, as income increased over time one would expect charitable giving relative to income to decline. 29 Charitable bequests are given by estates upon an individuals’ death. It is estimated that about 120,000 estates leave bequests each year. Most bequests come from small to mid-sized estates, where the estate is small enough in size that filing of estate tax returns is unnecessary. Only about 8,000 estates filed estate tax returns in 2008. These 8,000 estates were responsible for about 85% of all giving via bequests, illustrating that giving via bequests is highly concentrated amongst the most wealthy decedents.30 Concern is often expressed that a reduction in or elimination of the 27 The Center on Philanthropy Panel Study does not include data from very-high-income households. 28 William Randolph, “Dynamic Income, Progressive Taxes, and the Timing of Charitable Contributions,” The Journal of Political Economy, vol. 103 (August 1995), pp. 703-738; Gerald E. Auten, Holger Sieg, and Charles T. Clotfelter, “Charitable Giving, Income, and Taxes: An Analysis of Panel Data,” The American Economic Review, vol. 92, no. 1 (March 2009), pp. 371-382; and Jon Bakija and Bradley Heim, How Does Charitable Giving Respond to Incentives and Income? Dynamic Panel Estimates Accounting for Predictable Changes in Taxation, National Bureau of Economic Research, Working Paper 14237, Cambridge, MA, August 2008. 29 For further discussion see CRS Report R40518, Charitable Contributions: The Itemized Deduction Cap and Other FY2010 Budget Options, by (name redacted) and (name redacted). 30 The Center on Philanthropy at Indiana University, Giving USA 2009, p. 53. Congressional Research Service 27 An Overview of the Nonprofit and Charitable Sector estate tax would lead to reduced giving to the charitable sector.31 Recent work has found that bequests are responsive to changes in estate taxes as well as overall wealth. 32 Corporate giving can be made in one of two ways. The first way is as a direct gift from the corporation. The second way is via a corporate foundation. A typical corporation is estimated to give about 1% of its domestic pre-tax income to charitable organizations, or about 0.08% of corporate sales.33 Corporations’ charitable deductions are generally limited to 10% of taxable income, among other restrictions. The final source of private contributions or charitable gifts comes from foundations. As noted above, in relative terms, giving by foundations has increased more than giving by individuals, bequests, and corporations over the past decade. In 2008, The Bill and Melinda Gates Foundation gave $2.8 billion in grants (giving by all foundations was $41.2 billion in 2008). Giving by the Gates Foundation increased by $0.8 billion between 2007 and 2008, contributing to the overall stability of foundation giving between 2007 and 2008 as grantmaking by other foundations fell. Government Financing: Grants and Transfers From Figure 4, government grants and payments to charitable organizations were $351 billion, or 29% of charitable organizations’ total revenue. What Figure 4 does not do is identify whether payments were made for fees for service (such as Medicare payments), grants, or transfers. Similarly, Figure 5 shows that the share of government grants and payments in total revenue varies substantially across different types of charities. Government grants and payments are much more important in health (37%) and human services (36%) than in other types of charitable organizations. Table 11 reports estimates of the share of revenue that comes from grants alone, excluding fees for services. These data are gathered directly from the Form 990 for charitable organizations that were required to report. The data used to generate Figure 4 and Figure 5 were from the IRS Statistics of Income division exempt organization sample files on public charities. In a few cases grants are larger as a share of income than the share of total payments reported above. These grants, of course, may have performance requirements, but they are not allocated to particular individuals and services received. Table 11. Share of Revenue from Government Grants, 2005 Type of Nonprofit Share From Government Grants (%) Arts, culture, and humanities 12.5 Education 14.9 Environment and animals 14.1 31 For estimates of how changes in the estate tax would impact charitable giving see CRS Report R40518, Charitable Contributions: The Itemized Deduction Cap and Other FY2010 Budget Options, by (name redacted) and (name reda cted). 32 Jon M. Bakija, William G. Gale, and Joel B. Slemrod, “Charitable Bequests and Taxes on Inheritances and Estates: Aggregate Evidence from across the States,” American Economic Review, vol. 93, no. 2 (May 2003), pp. 366-370. 33 Sophia A. Muirhead, The 2006 Corporate Contributions Report, Conference Board, Report R-1399-06-RR, New York, NY, 2007. Congressional Research Service 28 An Overview of the Nonprofit and Charitable Sector Type of Nonprofit Share From Government Grants (%) Health 3.4 Human services 22.7 International and foreign 21.9 Other 18.9 Total 9.0 Source: CRS calculations using data from Wing, Pollak, and Blackwood, The Nonprofit Almanac, 2008, p. 134. Government grants are about 9% total revenue for the charitable sectors included in Table A-1, or about $100 billion for 2005. The data indicate that government payments for health as a share of revenue are primarily due to fees. Virtually all of the government payments in the remaining sectors, other than human services, reflect grants.34 Grants are most important in human services and international organizations, and least important in health. These data do not include religious organizations, where government grants are unlikely to be an important source of revenue. Grants reflect the nature of the specific charities (they are less important for organizations such as hospitals that rely heavily on fees). Grant support is more important in areas where the government has a special interest, such as the human services and international sectors. The Bureau of Economic Analysis’s (BEA’s) National Income and Product Accounts provides information on government transfers, which are relatively small. In 2007, the government provided approximately $20 billion in transfer payments for all nonprofit organizations serving households. 35 It is not clear how transfers are defined, but grants can include contracts and agreements for services, as well as transfers. The BEA data does not separate these transfers by type of charitable organization. The data presented here do not separate state and local government funding from federal government funding. Government funding to charitable organizations may come directly from the federal government, from state and local governments that have received the funding from the federal government (rather than raised the revenue themselves), or directly from state and local governments. One study finds that, for 2001, only 12% of grants and fees originate with state and local governments; 37% are financed by the federal government but flow through to nonprofits via state and local programs, and the remaining 51% are provided directly by the federal government.36 If Medicare and Medicaid, the main fee-related items, are excluded, the states continue to supply only a small share (9% of their own funds) but administer a much larger share of federal funds (61%). While the federal government appears to be the primary source of funds via grants, state and local governments are the primary source of oversight. 34 Figure 5 does not report international, which is a very small charitable sector. In the international sector government grants and payments were 20% of revenues, which, comparing with the shares in Table A-1 indicates that all government support to the international sector came in the form of grants. 35 See http://www.bea.gov/scb/pdf/2008/11%20November/1108_newnipas.pdf. 36 Woods Bowman and Marion R. Fremont Smith, “Notes on Nonprofits and State and Local Governments” In Nonprofits and Government, Collaboration and Conflict, ed. by Elizabeth T. Boris and C. Eugene Steuerle, Washington, D.C., Urban Institute 2006 , pp. 181-218. Congressional Research Service 29 An Overview of the Nonprofit and Charitable Sector The Business Cycle’s Impact on Funding As is the case for many entities during an economic downturn, charities may suffer declines in funding. For some, the decline comes at the time when their services may be in greater demand. Analysis of past recessions suggests that the level of charitable giving declines during downturns, but that charitable giving as a percentage of income does not decline. The level of giving has declined during the current recession. Nonprofits overall tend to fare no worse than, and perhaps better than, other sectors during downturns, although this recession may have been more troubling because of the fall in asset values. There are significant differences in giving trends across different types of charitable organizations. The greatest decline in giving during the recent economic downturn has been for human welfare organizations. Human welfare organizations as a sector are likely to experience increased needs for their services during a downturn. While giving declined in inflation-adjusted terms between 2007 and 2008 by 6%, the decline for human services organizations was 16%.37 Recessions can also affect assets, such as those held by university endowments and foundations (whose purpose is primarily to provide grants to active charitable organizations). The current recession has been accompanied by a significant fall in the value of assets which affected charitable organizations’ assets. Despite the fall in asset values and in gifts to foundations, foundation grants to other organizations fell less than inter-vivos giving by individuals, bequests, and corporate giving. Another major pressure on nonprofits during the recession has been the decline in support by governments (primarily state governments), including delays in payments. A recent survey of nonprofit organizations found that 35% have experienced a loss in government support while 37% reported experiencing delays in government payments.38 How Have Nonprofits Fared During Past Economic Downturns? Sectors of the economy fare differently during a recession. Generally, sectors that produce investment and durable consumer goods (such as housing, automobiles, and household furnishings) and luxuries tend to suffer the largest declines in demand. Necessities and items that are immediately consumed, such as food and health care, tend to be more resistant, as are items that are a small part of the household budget. That is, individuals tend to economize on big-ticket items whose purchase they can delay. Charitable contributions tend to share features of both types of goods. While charitable contributions are not a necessity, they are typically small as a part of individuals’ budgets. Evidence indicates that there is a tendency for giving to fall in real (inflation adjusted) terms during a recession. During the 12 recession years since 1967, charitable giving declined in 8 of those years.39 37 The Center on Philanthropy at Indiana University, Giving USA 2009, p. 119. 38 Lester M. Salamon, Stephanie L. Geller, and Kasey L. Spence, Impact of the 2007-2009 Economic Recession on Nonprofit Organizations, Johns Hopkins University Center for Civil Society Studies, Communique No. 14, 2009, http://www.ccss.jhu.edu/pdfs/LP_Communiques/LP_Communique_14.pdf. 39 USA Today, Giving by the Numbers, April 24, 2009, http://www.usatoday.com/news/sharing/2009-04-13numbers_N.htm?loc=interstitialskip Congressional Research Service 30 An Overview of the Nonprofit and Charitable Sector Charitable Contributions in Past Recessions Although real giving tends to decline during recessions, it is not clear that giving is affected more than average expenditures. Figure 9 shows the pattern of giving as a percentage of GDP from 1967 through 2008. Recession years are noted via shaded bars.40 Charitable giving as a percentage of GDP has remained relatively stable over business cycles. Overall, there has been an upward trend in giving as a share of output since the 1980s. Figure 9. Charitable Contributions as a Percentage of Output, 1967-2007 2.50% 2.00% % GDP 1.50% 1.00% 0.50% Individual Charitable Contributions 20 07 20 05 20 03 20 01 19 99 19 97 19 95 19 93 19 91 19 89 19 87 19 85 19 83 19 81 19 79 19 77 19 75 19 73 19 71 19 69 19 67 0.00% Other Charitable Contributions Source: CRS calculations based on the Center for Philanthropy, Giving USA 2009, and National Income and Product Accounts. Other charitable contributions (the difference between the two lines) include corporate, foundations, and bequests. A version of this chart appeared in CRS Report R40518, Charitable Contributions: The Itemized Deduction Cap and Other FY2010 Budget Options, by (name redacted) and (name redacted). The Current Recession: Charitable Giving in 2008 Charitable giving declined during the recent recession, with a fall of 2% in nominal terms from 2007 to 2008.41 This reduction was a decline of 5.7% adjusted for inflation. The declines differed 40 The small dip and peak around 1986 is generally attributed by most researchers to a temporary rise in deductions reflecting a timing shift as tax cuts for 1987 and 1988 were pre-announced in the 1986 tax cut. By 1989 contributions had returned to their previous levels. 41 The data on patterns of giving between 2007 and 2008 are from The Center on Philanthropy at Indiana University, Giving USA 2009, p. 210. A summary of the findings can be found at http://www.philanthropy.iupui.edu/News/2009/ docs/GivingReaches300billion_06102009.pdf. Information on the effects by sector are also summarized at http://blog.charitynavigator.org/2009/06/giving-in-2008.html. Congressional Research Service 31 An Overview of the Nonprofit and Charitable Sector depending on both the source of giving and the recipient as shown in Table 12. The pattern for foundation grants suggests that, despite the loss in value that occurred in assets in this period, using assets to finance grants seemed to provide more stability in giving. There is evidence that giving by foundations has acted as a stabilizing force in the past.42 Table 12. Changes in Giving by Source, 2007-2008 Share of Giving (%) Nominal Change (%), 2007-2008 Inflation Adjusted Change (%), 2007-2008 Individual 75.0 -2.7 -6.3 Bequest 7.0 -2.8 -6.4 Foundation 13.0 3.0 -0.8 Corporate 5.0 -4.5 -8.0 Total 100.0 -2.0 -5.7 Source of Giving Source: CRS calculations using data from The Center on Philanthropy at Indiana University, Giving USA 2009, pp. 210-211. The effects also differed by the recipient of giving. As shown in Table 13, different types of charities are affected in different ways. Religious giving, which accounts for the largest share of the total, had an increase in real giving between 2007 and 2008 of 1.6%, a differential of 7.3 percentage points from the average effect. The other sector with an increase, public society benefit organizations, include organized giving arrangements that flow through to other beneficiaries, such as United Way, Jewish funds, and donor-advised funds. The largest decline in giving was for foundations, but these institutions largely accumulate assets and make grants to other organizations, and their giving to other organizations was more stable than other giving. Outside of foundations, the organization that had the greatest drop in inflation-adjusted contributions, 16%, was for human services, where the needs during a downturn and dependence on contributions are likely the greatest. Most other institutions had a real decline of 9% to 10% (education, health, arts, environment), 4 percentage points worse than the average across all institutions. International affairs had a smaller drop than average, 3.6%. Table 13. Changes in Giving by Recipient, 2007-2008 Share of Giving (%) Nominal Change (%), 2007-2008 Inflation Adjusted Change (%), 2007-2008 Religious 35.0 5.5 1.6 Educational 13.0 -5.5 -9.0 Foundations 11.0 -19.2 -22.2 Human services 9.0 -12.7 -15.9 Health 7.0 -6.5 -10.0 Charitable Recipient Sector 42 Steven Lawrence, Do Foundation Giving Priorities Change in Times of Economic Stress? Foundation Center, http://foundationcenter.org/gainknowledge/research/pdf/researchadvisory_economy_200811.pdf. Congressional Research Service 32 An Overview of the Nonprofit and Charitable Sector Inflation Adjusted Change (%), 2007-2008 Charitable Recipient Sector Share of Giving (%) Nominal Change (%), 2007-2008 Public society benefit 8.0 5.4 1.5 Arts, culture, humanities 4.0 -6.4 -9.6 International affairs 4.0 0.6 -3.6 Environment/animals 2.0 -5.5 -9.0 Source: The Center on Philanthropy at Indiana University, Giving USA 2009, pp. 212-215. Unallocated giving accounts for 6% of giving. It is important to note that nonprofit organizations that receive charitable contributions generally have other important sources of revenue, such as user fees, earnings from assets, or government support. Figure 4 shows that total charitable contributions received as a share of total revenue of public charities was approximately 12% in 2005. For the health care sector, which includes nonprofit hospitals, charitable contributions were approximately 2% of total revenue in 2005 (see Figure 5). The share of charitable contributions in total revenue varies for other sectors. In 2005, arts, culture, and humanities organizations received approximately 43% of their revenue from charitable contributions, the education sector about 13%, environment and animals 48%, and human services 16%. Some of these nonprofit institutions may be fairly resilient to cyclical pressures (such as hospitals). Attendance at colleges and universities is also likely to rise when jobs are scarce. Charitable organizations and giving are also linked to endowments which can be a source of funds in difficult times (but may also fall in value during a recession). Endowments and Assets The National Association of College and University Business Officers (NACUBO) follows the endowment size of colleges and universities, covering their fiscal years which normally begin on July 1. For the 2008 fiscal year (covering the second half of 2007 and the first half of 2008) asset values rose by 0.5%, a loss in real terms and much smaller than previous growth. A special follow-up survey found a 22.9% decline in the five months from July 1, 2008, to November 30, 2008.43 (Corporate stocks fell further, but have since begun to recover.) Foundations experienced a 28% drop in the value of assets during 2008.44 Foundations hold a large quantity of financial assets. In 2007, total foundation assets were estimated to be $682 billion.45 Community foundation assets represent a relatively small share of 43 NACUBO and Commonwealth Institute Survey, http://www.nacubo.org/documents/research/NES2008FollowupSurveyReport.pdf. 44 Asset Declines and Investment Strategy: Change by Family, Independent, and Public Foundations, Council on Foundations, http://www.cof.org/files/Documents/Conferences/09FamPhilConf/EconSurvey4.pdf. 45 See http://foundationcenter.org/findfunders/statistics/pdf/02_found_growth/2007/04_07.pdf. Congressional Research Service 33 An Overview of the Nonprofit and Charitable Sector that total, $56 billion in 2007.46 The largest foundation, the Bill and Melinda Gates Foundation, had assets of $39 billion, while the top 10 foundations by asset size held $112 billion in 2007.47 Data on returns filed with the Internal Revenue Service on public charities showed assets held by charities in 2006 to be $2.2 trillion, but a large share of this figure is likely to be buildings and other physical assets. (This amount does not include most assets of religious organizations.) Charitable organizations related to health (likely to be hospitals) accounted for $867 billion. Education accounted for $682 billion. Educational institutions are known to have large endowments, and endowments accounted for half their assets.48 University endowments had been growing rapidly, and in the latest reports, total assets rose to $837 billion (the total for all public charities was $2.6 trillion, and for hospitals $921 billion).49 Earnings from endowments appear, overall, to be larger than receipts from charitable contributions for colleges and universities, although endowments are highly concentrated in large institutions.50 Another consequence of loss of asset value is likely reduced individual giving, especially by high-income donors and through bequests. High-income donors tend to be more likely than the average donor to contribute to certain types of nonprofits, such as health, education, and arts, as well as foundations, and less likely to contribute to religious and human welfare organizations.51 As asset values fall, reducing the wealth of high-income donors, charitable contributions tend to decline. Outlook 2009 Although annual data for 2009 are not available, surveys have been conducted regarding how charities are faring. A summary report has been published by the National Council of Nonprofits.52 This overview provides information suggesting nonprofits continue to feel the pressures of increased demand for their services coupled with decreasing revenue. More than a third of nonprofits have had to cut operations. The surveys, particularly several state surveys, cite reduced support from governments as more problematic than reduced support from individual and foundation giving (corporate giving is also cited as declining significantly). Although all three levels of government (federal, state, and local) are mentioned, it is primarily state support that is falling. In addition to funding cuts, states apparently have been delaying payments for services they have contracted with nonprofits to provide. One study, from Connecticut, is specifically focused on contract payment delays.53 One national survey found that 35% of respondents 46 See http://foundationcenter.org/findfunders/statistics/pdf/02_found_growth/2007/00_07.pdf. See http://foundationcenter.org/findfunders/topfunders/top100assets.html. 48 Based on total endowments reported in (name redacted), testimony before the Senate Finance Committee, September 26, 2007; the sum of endowments reported by NACUBO, http://finance.senate.gov/hearings/testimony/ 2007test/092607testjg.pdf. 49 See http://nccsdataweb.urban.org/NCCS/V1Pub/index.php/. 47 50 (name redacted), testimony before the Senate Finance Committee, September 26, 2007; the sum of endowments reported by NACUBO, http://finance.senate.gov/hearings/testimony/2007test/092607testjg.pdf. CRS Report R40518, Charitable Contributions: The Itemized Deduction Cap and Other FY2010 Budget Options, by (name redacted) and (name redacted). 51 See CRS Report R40518, Charitable Contributions: The Itemized Deduction Cap and Other FY2010 Budget Options, by (name redacted) and (name redacted). 52 See http://www.councilofnonprofits.org/files/Special%20Report%208%20-%20A-Respectful-Warning-Call-to-OurPartners-in-Government-The-Economic-Crisis-Is-Unraveling-the-Social-Safety-Net-Faster-Than-Most-Realize.pdf. 53 See http://www.ctnonprofits.org/ctnonprofits/sites/default/files/fckeditor/file/policy/advocacy/ (continued...) Congressional Research Service 34 An Overview of the Nonprofit and Charitable Sector reported declines in government support and 37% reported delayed payments from the government. Some additional funds for charitable activities were provided in the 2009 federal stimulus plan, many of these funneled through state and local governments. The additional funding was summarized in a publication by the National Council of Nonprofits.54 Overall, however, it appears that governments, particularly state governments, may be contributing to the financial difficulties of nonprofit organizations, even to the point of not paying for contracted services. The Charitable Sector’s Relationship with Government Various charitable activities are subsidized by the federal tax code or funded via government grants. In order to understand the rationale for government support of the charitable sector, it is important to understand the economic theories relevant for charitable activities. Market Failures: Justifying the Subsidization of Charities There are two types of market failures used to justify government subsidization or support of the charitable sector. The first is the notion of public goods. Generally, the free market will provide too few public goods, due to the free-rider problem. Government intervention can help by increasing the quantity of public goods provided. The second relevant market failure is externalities. An externality is an outcome of a transaction whereby the market participants do not face the full cost or benefit of their actions. Each of these market failures is discussed in the context of the charitable sector in the following sections. Public Goods Pure public goods are characterized by two properties: the fact that they are non-rival and nonexcludable. For a good to be non-rival, one person’s consumption of the good does not diminish another’s ability to consume that same good. For a good to be non-excludable, it is either impossible or prohibitively expensive to prevent consumption of the good once the good has been provided. One example of a pure public good is clean air. The market itself is unlikely to provide a public good due to the free-rider problem. Once a public good, such as clean air, is provided, it is available for everyone to enjoy. Since individuals know that the pure public good, such as clean air, will be available to them once provided they may wait for others to provide the good and not contribute themselves. Without contributions, the good is not provided. Just because a good has the characteristics of a public good, it does not mean that this good will not be provided (at least partially) by the private market. In some cases, one person’s demand for (...continued) HowLatePaymentsHarm NonprofitProviders_0509.pdf . 54 See http://www.councilofnonprofits.org/files/ Special%20Report%201%20%20Overview%20(Feb%2023%20FINAL).pdf. Congressional Research Service 35 An Overview of the Nonprofit and Charitable Sector a good may be high enough that they are willing to provide the good on their own. Once provided, the public good is there for all to enjoy. Individuals also tend to give more towards providing public goods than standard economic models would predict. 55 This happens to the extent that individuals are altruistic, and care about the well-being of others in addition to their own well-being. Altruism, and the well-being that individuals get from giving, motivates people to give both time and money to causes like religious organizations, disaster relief, local charities, educational institutions, and research causes among others. Economists have also postulated that the warm glow model can be useful in explaining why individuals give to charity. 56 In the warm glow model, individuals not only care about the total amount of the public good provided, but also about their individual contribution to the total. Individuals are expected to contribute to a charitable cause up to the point where their contributions cease to make them better-off. Even under a warm glow model, economists expect public goods to be underprovided, since individuals do not take into account the positive external effects of their contributions. Individuals may be motivated to give to charitable causes to the extent that their own well-being depends on the well-being of others in society. Here, redistribution has the potential to make all members of society better off.57 In this sense, increasing the consumption of the poor can be viewed as a public good. Redistribution can improve everyone’s well-being, but the optimal level of redistribution is not likely to be achieved by the market absent government intervention, due to the free-rider problem. To the extent that charitable goods and services are underprovided by the market, government subsidization of charitable activities (or government provision of goods and services provided by charities) can increase overall well-being. The government supports charitable organizations that provide public goods in two major ways. First, the government provides grants directly to charitable organizations providing public goods. Second, the government provides tax breaks to charitable organizations providing public goods. Externalities The second rationale for government intervention via the charitable sector is the case of externalities. A number of activities in the charitable sector are associated with positive externalities. With a positive externality, there are benefits to engaging in certain transactions that do not accrue to either party involved in the transaction. For example, education is thought to have positive externalities. Not only does the person receiving an education benefit, but educated people are better equipped to participate in a functional democracy. Knowledge has positive externalities to the extent it is transferred between individuals outside of the formal education setting. Health care provision may also have positive external effects. When an individual receives a vaccine against a communicable disease, not only does that individual benefit by not becoming ill, but the entire community benefits as the risk that the individual will spread the disease to others is diminished. Subsidization of organizations providing goods and services associated with positive externalities has the potential to increase society’s overall well-being. 55 Standard economic models assume that rational individuals are selfish and utility-maximizing. Jonathan Gruber, Public Finance and Public Policy (New York, NY: Worth Publishers, 2007). 57 It was shown that income redistribution could make everyone better off by Harold M. Hochman and James D. Rogers, “Pareto Optimal Redistribution,” American Economic Review, vol. 59, no. 4 (September 1969), pp. 542-557. 56 Congressional Research Service 36 An Overview of the Nonprofit and Charitable Sector Is There an Economic Rationale for Nonprofit Hospitals? Some have come to question whether the favorable tax treatment for some charities is justified, such as the exemption for nonprofit hospitals. In the United States, there are both for-profit hospitals and nonprofit hospitals. Only nonprofit hospitals may qualify for tax-exempt status as 501(c)(3) charitable organizations.58 In order to qualify, the hospital must provide charity care and “community benefits.” Under the community benefit standard, hospitals are judged on whether they promote the health of a broader class of individuals in the community.59 A hospital could meet the standard by providing charity care (i.e., free or reduced-cost care). However, there is no requirement that hospitals provide charity care, and they may qualify for the 501(c)(3) charitable status by providing other types of community benefits. Given the large loss in tax revenue associated with treating nonprofit hospitals as tax-exempt 501(c)(3) organizations, it has come into question whether the benefits provided by these institutions are worth the costs.60 Some have argued that since hospital services are not a public good (a person’s consumption of medical care is rival and excludable), hospitals should not be given the same tax advantage as other charitable organizations providing true public goods. 61 Analysis comparing nonprofit hospitals to for-profit hospitals has found that nonprofit hospitals do provide higher levels of uncompensated care, more emergency room care and labor and delivery care, but less Medicaid care. The monetary value of community benefits provided by nonprofit hospitals is unclear, leaving open the question as to whether the favorable tax treatment is justified. 62 58 Nonprofit hospitals are a highly significant portion of the charitable sector. In 2004, nonprofit hospitals held 29% of total assets and collected 42% of total revenues within the charitable sector. See Joint Committee on Taxation, Description of Present Law Relating to Section 501(c)(3) Organizations and Summary of Sections 501(c)(3)-Related Provisions of the Pension Protection Act of 2006 and Proposed Legislative Proposals, JCX-53-07, July 19, 2007, http://www.house.gov/jct. 59 See CRS Report RL34605, Tax-Exempt Section 501(c)(3) Hospitals: Community Benefit Standard and Schedule H, by (name redacted) and (name redacted) for further discussion of the charity care and community benefit standards. The report also reviews the new annual reporting requirements (Schedule H of the Form 990) placed on hospitals. Beginning in 2009, completion of Schedule H of Form 990 is mandatory. 60 In 2002, the Joint Committee on Taxation estimated that the exemption from income taxes given to nonprofit hospitals provided a tax savings of $2.5 billion while the ability to use tax-exempt bonds provided another $1.8 billion in tax savings, for an overall estimate of tax savings of $4.3 billion. If these tax preferences were removed, the federal revenue gain may be less than $4.3 billion as behavioral changes as hospitals move to minimize the tax burden are not considered. See Congressional Budget Office, Nonprofit Hospitals and Tax Arbitrage, December 2006. When the value of additional tax benefits, such as the deductibility of contributions to charitable hospitals on individual income taxes, sales tax, and property tax exemptions were included as well, the Joint Committee on Taxation estimated that the 2002 value of all tax exemptions (federal, state, and local) for nonprofit hospitals and their supporting organizations was $12.6 billion. See Congressional Budget Office, Nonprofit Hospitals and the Provision of Community Benefits, December 2006. 61 Andrew Chamberlin and Mark Sussman, Charities and Public Goods: The Case for Reforming the Federal Income Tax Deduction for Charitable Gifts, Tax Foundation, No. 137, November 2005. 62 Congressional Budget Office, Nonprofit Hospitals and the Provision of Community Benefits, December 2006. A recent GAO report also finds that measuring the benefits provided by nonprofit hospitals continues to be a difficult task. The report is hopeful that new IRS reporting requirements for nonprofit hospitals will afford greater understanding of the extent to which nonprofit hospitals provide community benefit in the near future. See U.S. Government Accountability Office, Nonprofit Hospitals: Variation in Standards and Guidence Limits Comparison of How Hospitals Meet Community Benefit Requirements, GAO-08-880, September 2008, http://www.gao.gov/new.items/ d08880.pdf. Congressional Research Service 37 An Overview of the Nonprofit and Charitable Sector Relationship with the Federal Government The government supports and affects nonprofits in several ways in addition to providing grants and transfers. Recently, the federal government has begun undertaking social innovation initiatives involving nonprofits. As noted above, payments and grants to nonprofits from the government represent a significant share of receipts, although the importance of the share varies by type of nonprofit, and transfers per se are small. Another significant source of government support to the charitable and nonprofit sector arises from tax benefits, provided by both federal and state governments.63 These relationships are discussed below first for the federal government and then for state and local governments. 64 Estimates regarding the value of the government’s relationship with the charitable sector suggest that grants amount to about $100 billion, with the federal government supplying about 90% of the funds. Federal tax subsidies are valued to be approximately $115 billion to $130 billion, and state and local tax subsidies are approximately $30 billion to $50 billion. In sum, the government provides approximately $245 billion to $280 billion to the nonprofit and charitable sector via grants and tax subsidies. Federal Government The federal government’s oversight over charities largely stems from the tax benefits provided to the sector. Nonprofit and charitable organizations are generally exempt from tax on most income, including investment income. Additionally, donations to charitable organizations are tax deductible, effectively subsidizing charitable giving. Recent legislation established a social innovation fund in the Corporation for National and Community Service, and President Obama has created the White House Office of Social Innovation and Civic Participation to coordinate these efforts. This program is briefly discussed before turning to a discussion of several types of 501(c)(3) organizations and issues that have been subject to recent congressional interest and the financial benefits related to taxes and the postal subsidy. Social Innovation Initiatives The Edward M. Kennedy Serve America Act (P.L. 111-13) enacted in 2009 established a social innovation fund that is administered by the Corporation for National and Community Service. This corporation administers domestic volunteer initiatives (such as VISTA).65 A budget request for $50 million has been submitted. In addition, a White House Office of Social Innovation and Civic Participation has been established to coordinate these efforts. According to White House officials the objectives of this initiative were to develop partnerships with the private sector (nonprofits, businesses, and philanthropists), support and spread innovative ideas (such as Harlem 63 The federal government also provides a postal subsidy to the nonprofit and charitable sector. 64 Many of the issues addressed here are discussed in more detail in CRS Report RL34608, Tax Issues Relating to Charitable Contributions and Organizations, by (name redacted). 65 See CRS Report RL33931, The Corporation for National and Community Service: Overview of Programs and FY2009 Funding, by Abigail B. Rudman and (name redacted). Congressional Research Service 38 An Overview of the Nonprofit and Charitable Sector Children’s Zone), support greater civic participation through media, and promote national service. 66 Foundations Most foundations differ from operating charities in that they often have a single donor. In addition, while a gift to a foundation is deductible for income (and estate and gift) tax purposes, the funds are not immediately used for active charitable purposes. Rather, funds are invested and donations are often made to charitable organizations from earnings that may allow the corpus of the foundation to be maintained and grow. Contributing to a foundation and allowing the funds to grow allows the benefits of both the charitable deduction and the exemption of tax on earnings. To address concerns that foundations could simply retain earnings and grow indefinitely, and because foundations are often closely tied to a family or specific group of donors, tax laws require a minimum payout rate (5%) and restrict activities that may benefit donors. The tax code imposes taxes and/or penalties for self-dealing, failure to distribute income on excess business holdings, for investments that jeopardize the charitable purposes, and for taxable expenditures (such as lobbying or making open-ended grants to institutions other than charities). There is a 1% tax on investment income of foundations, and an additional 1% penalty if the foundation does not make a certain minimum distribution (based on distributions made in the previous five years), or has been subject to a tax for failure to distribute in the previous five years. Donor-Advised Funds and Supporting Organizations In recent years, concerns have been raised about charitable vehicles that have some of the same features as foundations: donor-advised funds and supporting organizations. Donor-advised funds are funds where donors make contributions to the fund and the institution holding the accounts makes contributions to charitable organizations with the advice of the donor. While the donor has no legal control, in practice the donor’s wishes are likely to be respected. Supporting organizations do not actively engage in charitable activities but support organizations that do by contributing funds. Supporting organizations fall into three categories: type I organizations directly controlled by the charitable organizations; type II organizations controlled by the same entity controlling the charitable organization; and type III organizations related to the charitable organization (these organizations may support many charitable organizations). Donor-advised funds and supporting organizations share many features with private foundations, but have historically not been generally subject to self-dealing rules and other restrictions (meant to prevent the donor from receiving a private benefit) or payout requirements (meant to keep the organization from accumulating funds without paying out some amount for charitable purposes). 67 In an effort to address concerns that abuses were occurring and that, in some cases, little was being paid out, the Pension Protection Act of 2006 (P.L. 109-280) imposed a number of regulatory requirements and also required a Treasury study of donor-advised funds and other 66 See http://www.whitehouse.gov/the_press_office/President-Obama-to-Request-50-Million-to-Identify-and-ExpandEffective-Innovative-Nonprofits/. 67 Self-dealing rules generally prohibit direct financial interaction between a foundation and nearly all persons closely related to the foundation (disqualified persons). The IRS provides further detail regarding transactions that violate the prohibition of self dealing for private foundations at http://www.irs.gov/charities/foundations/article/0,,id= 137679,00.html. Congressional Research Service 39 An Overview of the Nonprofit and Charitable Sector supporting organizations to evaluate whether they should continue to receive tax-exempt status. Donor-advised funds eligible for charitable contributions are prohibited from providing benefits to the donors, and are required to have a governance structure if grants are made to individuals (such as a scholarship fund). Contributions of closely held businesses must be sold within a short period of time. Supporting organizations must indicate which type they are and certain type III organizations will eventually be subject to a minimum payout. The Treasury Secretary was charged with determining the details of the minimum payout requirement through regulation. On September 24, 2009, the Treasury issued a proposed regulation to impose a 5% rate (which is the same rate that applies to private foundations), pending comments due in December 2009.68 At this time, however, donor-advised funds are not subject to a payout requirement. Endowments Endowments also share a number of characteristics with foundations. Specifically, deductions for the contribution are made in advance of the expenditure and the endowment principal may be maintained or grow. Endowments receive tax-exempt earnings, but there is no payout requirement. In recent years the growth of university and college endowments raised concerns and led to discussions of possible payout requirements. The Senate Finance Committee received testimony on college endowments in connection with hearings held on offshore funds in 2007. Major university endowments are invested in, among other assets, offshore hedge funds, and one issue discussed during the hearing was whether these investments were being used to avoid the unrelated business income tax. The witnesses discussed the growth of endowments and also addressed the relationship between endowments and affordability, showing that a very small increase in payout of universities and colleges with the largest endowments could obviate the need for tuition increases and could fund significant increases in student aid. 69 The Senate Finance Committee also sent a survey to colleges with endowments of more than $500 million to obtain more details about their endowments and payouts.70 Charitable Contributions While charitable deductions are available to all taxpayers, individuals who take the standard deduction do not use the charitable contribution deduction. (The logic behind the standard deduction is that it accounts for the tax-deductable activities of individuals choosing not to itemize deductions.) Slightly ove [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/crs%3AR40919. Public record. Not legal advice.