Do tax-exemptions for non-profits still make sense?

Tax breaks for non-profits support an vast array of activities that are generally supposed to support the public interest or welfare. Tax breaks support non-profits that include, e.g., churches and religions, social organizations, hospitals, medical research foundations, environmental advocacy groups, historical societies, medical service groups that provide services for the poor and others with limited access and so on.

Most of the organizations and causes that taxpayers support were relatively non-controversial for the most part. But that is changing. Religious groups such as the Catholic church and many evangelical groups are now fully engaged in unrestrained political advocacy. Political advocacy by churches arguably negates their tax exempt status. Some charities like Planned Parenthood have been controversial for a long time. On top of that, some tax exempt "charities", e.g., section 524 and 501(c)(4) political action committees (PACs) are tax exempt.

Some people don't support some or many church activities. Some religions don't support groups like Planned Parenthood and what they do. Given the typical PACs' job of spreading lies and smearing political opponents, one can reasonably ask why it is that taxpayers are forced to support those activities. Tax subsidies for spreading political poison by PACs arguably hurts the public interest. One can argue that what PACs, churches and groups like Planned Parenthood, the Sierra Club or the Boy Scouts do isn't worth the benefit that accrues to the public interest.

In other words, what is the cost-benefit for various tax exempt groups? On balance, is providing tax exemptions for all or some of these groups worth the cost? What is the cost? A trillion dollars per year or 10 billion? What is the value of the benefits that tax exempt groups provide? Can we afford that kind and level of support in view of our serious financial problems?

A 2009 study (see page 3) of 27 non-profit hospitals in the Chicago area estimated the value of tax breaks at $489 million in 2009 while the value of the services that were provided was about $175 million. That seems to argue that the tax breaks may not be worth it, assuming those numbers fairly represent the whole story. On the other hand, people who favor tax breaks for their preferred charity will probably find that the tax exemptions are well worth the cost. For example, charities will no doubt argue it would cost government more to do the charity's job while simply ignoring the question of whether or not some or all of the job should even be done at all. That's just how political advocacy works, or fails to work, depending on one's point of view.

Given our financial problems, it is time to ask the cost-benefit question. That requires a fair and brutally honest assessment based on facts, not spin. One cannot simply take conclusions from supporters of the status quo at their word. Its not clear we can afford it any longer, but getting a handle on the cost-benefit would help start an intelligent public debate.