When Tax-Exempt Nonprofits Detract Value from Society

Abstract

Nonprofits receive tax exemptions in return for social value creation and delivery. While the outcomes of these tax exemptions are often positive, there are value detracting situations in which the cost of granting the tax exemption is likely to exceed its benefits. To date, explanations for these value detracting situations remain scattered and discipline centric.Therefore, the purpose of this paper is to clarify the conditions under which tax-exempt nonprofits detract value from society. We survey fifteen years of tax-exempt nonprofit scholarship, across nine disciplines, and identify three value detracting conditions: policymaking and regulation intemperance, nonprofit management and governance distraction, and detection and prosecution inconsistencies. These three conditions interact and reinforce each other, compounding the value destruction to society. Overall, our findings offer important policy insights regarding the unintended consequences of tax exemptions and our framework can be used to identify negative return situations.

Is it time to clean up US tax-exempt nonprofit reporting?

“…The United Way, Salvation Army, YMCA, St. Jude Children's Research Hospital, Catholic Charities USA, Habitat for Humanity, American Cancer Society, Mayo Clinic, World Wildlife Fund, Metropolitan Museum of Art, and the Humane Society, are but a few of these big brand tax-exempt nonprofits. Despite this rapid growth in the tax-exempt nonprofit sector, a review of the legislative history would suggest that changes to the tax-exempt regulatory environment, over the course of time, have been relatively scant (Gamble and Muñoz, 2022).…”

“…The tax-exemptions given to nonprofits, act as an important organizational classification mechanism (Vergne and Wry, 2014), as well as a valuable competitive benefit. These exemptions warrant improved accountability standards, forcing leaders of tax-exempt nonprofits to justify distinctiveness, legitimacy, and membership in the tax-exempt category (Gamble and Muñoz, 2022). and account for the transmitted information about a tax-exempt nonprofit's actions, and therefore hold tax-exempt organizations more accountable (Akerlof, 1970;Herbig;1996).…”

“…One particular example is Yarmolinsky (2000), who points to the significant outcomes of nonprofits, in the provision of welfare, to those who cannot afford public services. However, within the tax-exempt nonprofit category there are also persistent challenges and criticisms centered on the organizational form and their processes (Drucker, 1995; Gamble and Muñoz, 2022). For example, prior scholarship has criticized loose nonprofit taxable activities (Yetman and Yetman, 2009), performance inefficiencies (Gamble and Muñoz, 2022), fraudulent practices (Archambeault et al , 2015; Greenlee et al , 2007), mission drift (Ebrahim et al , 2014; Yetman and Yetman, 2009) and governance-leadership failures (Fremont-Smith and Kosaras, 2003).…”

“…The first issue is the existing organizational accountability boundaries. Gamble and Muñoz (2022) find that policy and regulatory overindulgence, poor governance, as well as detection and prosecution inconsistencies, are damaging the potential value created by US nonprofits. The second issue with US tax-exempt nonprofits is a lack of reliable approaches to assess and compare their organizational impact (Archambeault et al , 2015; Gordon et al , 2007; Kroeger and Weber, 2014; Rawhouser et al , 2019; Scheetz et al , 2021; Willems et al , 2014).…”

“…Second, we propose and explain a US nonprofit reporting framework that builds on the growing support for <IR>. This framework responds to several scholars who have called for better reporting and disclosure practice in the nonprofit sector (Gamble and Muñoz, 2022). To highlight the utility of this tax-exempt nonprofit <IR> framework we offer an example, developed from multiple interviews with executives of a tax-exempt nonprofit.…”