April 03, 2008
Should the Government Dissuade Charities From Forming?
Jack B. Siegel, a charity consultant and author of the Charity Governance blog, is asking federal and state officials to start a public campaign to dissuade Americans from starting new nonprofit groups.
In response to the news that the Internal Revenue Service received 85,771 applications for new tax-exempt groups during a 12-month period starting October 1, 2006, Mr. Siegel writes, “someone needs to find a way to stop people from creating charities, or at least so many. Do we need more social-service agencies, disaster-relief organizations, or charities that focus on various diseases? We suspect not.”
Jeff Brooks, creative director at Merkle, a fund-raising company, writes that so many charities brings inefficiency and duplication of efforts, but that the new organizations deserve a chance to compete for donor dollars.
Many of them may be serving local community needs that are ignored by other charities or bring new perspectives to entrenched social problems, he writes on his Donor Power blog.
“So I say to those tens of thousands of new nonprofits: Welcome to the profession. I hope you’re worth it!”
What do you think of Mr. Siegel’s idea? Should the government discourage the establishment of new charities? Click on the comment link below this post to share your thoughts.
— Ian Wilhelm
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America’s non-profit sector is one of the few places in which the free-market principle operates successfully. So let ‘em come on board. If they have a “product” that people want, they’ll succeed; if they don’t, they’ll be short-lived.
— Jonathan Levine Apr 3, 01:48 PM #
I would be careful about referring to the free market. I am a big believer in free markets, but the charity market ain’t so free. The income is tax-exempt, contributions are deductible, property is exempt from property taxation, postage rates are lower, bond financing is cheaper because the interest is is tax exempt, and organizations are eligible for government grants. In other words, charities are not restaurants or small businesses that come and go, with the cost of failure limited to the investors. For the sorts of subsidies provided, we should be getting something back for our tax dollars. Failure after failure and theft after theft is not simply the loss of private dollars in a competitive marketplace. It too often is the loss of public dollars.
— Jack Siegel Apr 3, 02:31 PM #
While the charity market isn’t a free market, it is a market. In his original post, Jack Siegel makes a good point as to the possible need for raising the IRS exemption application fee. The classic way of driving down demand for something is by raising the price. I wonder if charities do not value exempt status enough because they don’t actually pay a price anywhere near the cost of the IRS review and in proportion to the value of the benefit of a 501(c )(3)determination letter to the charity. On the other hand, the money spent on the application process could also go towards program services. It is worth considering though, if the overall cost to society is beyond the return made by the charity.
— Patrick Apr 3, 06:04 PM #
WADR to Mr. Siegel, his suggestion is quite absurd, both on its face and in its logistical implications. Who would decide and what would the criteria be as to what mission areas would be “OK” to start a new group in? And as to whether or not this market is “free,” the various benefits he enumerates which NPO’s enjoy are many of the defining characteristics of the sector itself! Not-For-Profits are born in order to address a community need as perceived by a person or group of people. Whether they succeed or fail is determined by myriad factors, only some of which have to do with the mission and/or performance of the organization. Giving the public sector – itself the largest funder of Not-For-Profits – the charge of dissuading citizens from initiating new third sector organizations makes no sense.
BTW, a corollary issue here is that of measuring societal benefits (organizational outcomes) vs. societal costs (subsidies or foregone revenue). Has anyone figured that out yet?
— Tom Welsh Apr 3, 07:30 PM #
At the very least, the IRS should be setting a high bar for how charities to prove exemption worthiness in the short and long-run. Applicants for new nonprofit status should be asked to discuss what other organizations exist in their field and why they feel their organization will be different or better. This would help people think about the fact that they should be considering if they could better serve the public by partnering with one of the many existing and often struggling nonprofits that have already invented their wheel.
— Amie Latterman Apr 4, 01:56 PM #
I want to echo Amie’s comment that there be better examination of what other organizations to partner with exist before tax-exempt status is granted. If this is a free market then good market research should occur as well.
— Susan Hammond Apr 4, 09:34 PM #