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Nonprofits in Legislators Eyes: Everything Old Is New Again

May 28, 2008

(Michael Seltzer is a regular contributor to PhilanTopic. He filed his most recent post earlier this month from the Council on Foundation's Philanthropy Summit.)

On the front page of Monday’s New York Times, Stephanie Strom reported on a ruling of the Minnesota Supreme Court that requires the Under the Rainbow Child Care Center, a small nonprofit daycare organization in Red Wing, to pay property taxes ("Tax Exemptions of Charities Face New Challenges," New York Times, May 26, 2008). The organization, whose mission is "to provide care for children away from their homes," has not demonstrated a profit in any year of its existence and receives 95 percent of its operating budget of $550,582 from fees for service paid by families or by the county and tribal governments.

This isn't a new occurrence. Whenever the economy slows and tax revenues decline, local municipalities begin to scramble for additional sources of revenues, often focusing on small, politically weak nonprofit organizations. In New York City in the early 1980s, for example, former Mayor Ed Koch made noises about stripping nonprofits that owned their buildings of their real estate tax exemption. The uproar that ensued led to the formation of the Nonprofit Coordinating Committee of New York, which has endeavored ever since to make the public-benefit case for nonprofit organizations whenever local or state officials look to the sector as a source of revenue.

I understand the motivation of legislators and judges who want to subject the nonprofit sector, which has grown substantially in size since the 1960s, to greater scrutiny. The question for me, however, is, When is that scrutiny warranted?

In the case of the Minnesota daycare center, the court's argument is rather weak. The "essence of charity," the court said, is the "provision of services as a gift to the recipient." Minnesota law currently does not contain a clear definition of what does and does not qualify as a "purely public charity," and that has created a great deal of uncertainty for many nonprofit organizations. The Minnesota Council of Nonprofits and other organizations are encouraging the Minnesota legislature to pass legislation that will give board members, nonprofit executives, and volunteers clear guidance on this question and have asked for a moratorium on any changes in nonprofits' property tax exempt status that might result from the December 2007 decision in Under the Rainbow. On the last night of the 2008 Minnesota legislative session, the Omnibus Tax Bill passed with the House version of the moratorium language. It now goes to the governor.

Governor Pawlenty would be well-advised to sign the bill. If the Minnesota Supreme Court's ruling stands, Under the Rainbow Child Care Center will have no choice but to raise its fees to cover the additional burden of having to pay property tax. In a slowing economy, the working families who depend on the center would be the ones who suffer most.

My point is simple: In their efforts to define "purely public charity," local authorities may soon find themselves facing a set of decisions requiring the wisdom of Solomon -- and no textbook to guide them.

-- Michael Seltzer

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