Nonprofit Tax Bias

Kevin Carey contrasts the tax status of two institutions in his neighborhood. On the one hand, you have the for-profit taxpaying Trapeze School and on the other hand you have the nonprofit, non-accredited International Graduate University which is basically a scam to get the president of the “university” out of the need to pay property tax on his house. Carey’s point is that the for-profit business can have positive externalities for the city and a non-profit can be selfish and useless.

Interestingly, having made the relevant point, he shies away from the conclusion and writes that non-profit tax bias “is probably a good idea.”

I disagree, and would distinguish between two forms of non-profit tax bias. The good kind of bias is that the income tax code encourages rich people to give money away rather than spending it on consumption. This is is pretty reasonable, and if we increased taxation of high-end consumption (which we should) the tendency would increase. The bad kind of bias is exempting land and structures owned by nonprofits from taxation. This has a lot of pernicious consequences. For starters, it deprives local government of money they need. Starving public school systems of revenue in order to subsidize colleges doesn’t make a ton of sense. Worse, it encourages inefficient use of scarce urban land which ends up reducing labor market opportunities throughout the community. Last, it encourages nonprofits to overinvest its financial resources in land and structures relative to other possible undertakings.

This ought to be an argument that conservatives embrace, since it all comes down to a misguided assumption that nonprofits should be valorized over businesses. Unfortunately, the main beneficiary of nonprofit tax bias is churches, and conservatives love churches. The church case is, however, a particularly pernicious one since one-day-a-week religious services are an exceptionally poor use of scarce land and it’s simply not the case that building more lavish church structures attracts God’s favor. I think I’m more likely to be smitten by a vengeful God while sitting at my desk than to see a movement on reforming this aspect of urban tax codes, but it’s still a good idea.