Tuesday, April 6, 2010

In which nonprofits compete unfairly.

So it seems that the fight over "unfair competition" from nonprofits is sprouting up again, this time in the form of objections to fitness centers in churches. Basically, the complaint is that churches can afford to charge much lower rates than commercial fitness centers not only because they have much easier access to clients, but also because they don't have to pay taxes, and can pass some of those savings on to customers.

I wasn't aware of this, but it seems this debate has existed for as long as clause 501(c)(3) has governed nonprofit tax exemptions. Small business owners get worried that nonprofits will undercut them by providing the same services without having to pay taxes on their profits.

I really don't get how this is a serious complaint. Is the fear here that small-business owners will be driven out of business by nonprofits providing the same services, and eventually all profits (which will then be known as surpluses) will be used for the public good?

One fear that might be raised in this regard is that the only limit 501(c)(3) status places on executive salaries is that they be "reasonable." Lax enforcement of this means that nonprofits can, to some extent, distribute the results of commercial activities to executives rather than to projects that benefit the public good -- and occasionally, they do.

But in order to have serious fears about unfair competition, it seems like you need some evidence that this is leading to a flooding of markets with cheap nonprofit options, and that on the whole the proceeds aren't being used for the public good. And in order for that to happen, you'd need some incentives for people to fund such a project, given that they can't make money from a later sale of the organization. In principle, you could hire such a person as a consultant or executive, but in fact, I don't think the salaries are high enough to ever make it worthwhile to do so.

The one exception might be an industry that requires a very small initial investment -- so you don't need to find donors, but can pretty much fund yourself by providing services. In a case like that, one might find it worthwhile to dodge taxes by starting a company that's officially nonprofit, but mostly, it seems like you've got to be able to convince investors, and there's really not much you can promise them. So ultimately, I think what we're dealing with is really small business owners who really can't see the difference between selling mugs to support the opera and selling mugs to line your own pockets.

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