Why Should Any Of These Groups Have Tax-Exempt Status?

May 14th, 2013 at 9:20 am

Nope, I’m not going to defend the IRS, which appears to have acted in ways wholly inconsistent with their mandate for unbiased investigations into, in this case, whether certain political groups should receive tax-exempt status.  It is unclear how high up the chain of command these untoward actions went, but this morning’s news suggests it wasn’t just a few rogue auditors in Cincinnati. 

The problem wasn’t that the agency scrutinized these so-called “social welfare” organizations—as I’ll emphasize in a moment, tax law in this area is an accident going out to happen.  It’s that they violated neutrality, investigating conservative groups by searching on “tea party” and “patriot.”

Republicans will of course try to pin this on the President, despite the fact that since Nixon used the IRS to target his enemies, the president’s been barred from even discussing this kind of thing with the agency.

No, the problem here isn’t the president.  It’s the Supreme Court’s Citizen United decision and subsequent tax law written by Congress that gives these groups tax exempt status (under rule 501(c)(4)) as long as most of their activities are primarily on educating the public about policy issues, not direct campaigning.

Of course, the ambiguities therein are insurmountable.  Many of these groups, especially the big ones, spend millions on campaign ads mildly disguised as “issue ads,” and under current law they can do so limitlessly and with impunity.

According to today’s NYT:

The tax code states that 501(c)(4)’s must operate “exclusively” to promote social welfare, a category that excludes political spending. Some court decisions have interpreted that language to mean that a minimal amount of political spending would be permissible. But the I.R.S. has for years maintained that groups meet that rule as long as they are not “primarily engaged” in election work, a substantially different threshold.

Nowhere do the rules specify what “primarily engaged” means…

Again, I see no way that a government agency could fairly interpret and enforce these instructions.  What is “primarily engaged”–at which point does an issue ad cross the threshold into campaign ad—what kind of “education” is GPS Crossroads providing and how is it promoting “social welfare?”

Weirdly, the IRS hasn’t seemed particularly interested in going after the big fish here, like Rove’s Crossroads GPS on the right or Priorities USA on the left.  Instead, they appear to have systematically targeted small fry on the far right.  If so, not only is that clearly biased and unacceptable—it’s also ridiculous given the magnitude of the violations of tax exempt status by these small groups relative to the big ones.

At the end of the day, we should really ask ourselves what societal purpose is being served here by carving out special tax status for any of these groups.  If anyone can show me any evidence that the revenue forgone is well spent, that these groups are making our political system and our country better off, please do so.  If not, then no one’s saying shut them down—they’ve got a right to speak their minds.  But not tax free.

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15 comments in reply to "Why Should Any Of These Groups Have Tax-Exempt Status?"

  1. mitakeet says:

    That is sort of the key, isn’t it? Why should they be allowed to be tax exempt? What conceivable purpose does it serve society by allowing these organizations to avoid paying taxes?

    Having said that, you could quite easily argue that they totally lack any ‘income’ as the funds they have are from capital infusions, so there would be no tax implications anyway. They produce no revenue as far as I understand things, so how could they have to pay taxes anyway?


    • Jared Bernstein says:

      They typically have earnings from somewhere, like renting office space, holding events for $, providing a service. It’s that income which is exempted.


  2. Lars Olsson says:

    It’s not just the tax-exempt status, either. In fact, in my mind, it’s not even primarily the tax-exempt status. It’s the no-donor-disclosure ability. Part of the reason the public at large isn’t more incensed about (or even aware of) these issues is that we can’t know who’s really funding the campaigns, especially (but not exclusively) on the right.

    But can you imagine what people might think if there were complete transparency?


  3. Bart says:

    Do Tea Party groups applying for tax exempt status run any food banks, day care, soup kitchens, etc.?


  4. wendy beck says:

    Perhaps by looking at groups with these obviously political-sounding names (“Patriot” seems to be “owned” by the far right), the IRS was looking for low-hanging fruit to inspect. The big 501C4s like Crossroads, Priorities USA, etc. are cunningly named. I’d be curious if a group with “Move-On”, “Occupy” or some other left-sounding name (if any exist) might have been equally targeted. We shall see.


  5. justin f.n. case says:

    Your column was worthy of my time. My issue is far simpler. If I have to pay taxes then everybody should pay taxes. No exemptions. Definitely tax the church, the constitution can be changed. Todays mega-religious groups were clearly not anything the founders ever saw coming. Locally churches own office buildings that are for profit. you know what? I just ran out of fuel. I’m old and won’t be around too much longer. As long as I have xanax and bourbon. I’ll just try to ignore the world around me and hope it all goes to hell at the same time I do.


    • Alex Blaze says:

      Agreed. And who cares about the founders anyway? Nowhere in the Constitution does it mention tax-exempt status.

      But if you take away the government handout from the churches, I’m sure the “you’re not entitled to anything” corner will be the first to complain (heck, that quotation there is taken directly from a bumper sticker I saw on a car in a church parking lot down the street).


  6. Alex Blaze says:

    I really have a hard time feeling so bad for these groups. Yes, what the IRS bureaucrats did was probably illegal, but a plain reading of the law shows that they weren’t just making stuff up to go after conservatives. These organizations that were targeted often used the word “party” right in their names – something they do in their effort to rebrand the Republican base and then run their partisan candidates in GOP primaries. If they didn’t think their was any cachet in their explicitly partisan rhetoric, then they would have avoided it altogether since it just leads to confusion. Instead, they wanted to have their cake and eat it too, and worse they act all surprised when they actually succeed in confusing the people they didn’t want to confuse.

    At the base of this entire mini-scandal is the idea that free speech doesn’t just require money, but that it requires money from the government. It’s funny how groups that were founded on the explicit premise that no one should receive a government hand-out are the first to cry scandal when they don’t get theirs.


  7. Charles Johnson says:

    The 501(C)(3) organizations and private foundations are also suspect. Having organized both and having spent a long weekend at a Salk Institute Conference on how to get the most out of your private foundation, I can tell you these organizations can be just as political; at the very least, they can be advocacy organizations.

    One in particular used to annoy me. It was blatantly “educating” the public about the evils of public educations and the redeeming features of private schools paid for through vouchers. As contrasted with the C4’s, contributions to this foundation were tax-deductible. Consequently, avoided taxes were funding the destruction of public education in the U.S.

    Many of these tax-deductible organizations are really advocacy organizations and many are for the personal benefit of their organizers, who take benefits out of the tax-deductible funding.


  8. Pat says:

    When tax funding depends upon type of activity, the likelihood that persons will prefer those activities that do not generate taxes.

    That leaves legitimate questions of whether or not government generates enough, or any tax, based upon human services, and instead, must rely upon the transfer – manufacture of distribution – of goods for taxable funds upon which to lay a tax.

    Some nations like the UK rely upon a vat tax to address this problem, and tax transfers from whatever source generated to justify taxes, – which, in theory, could apply to tax exempt organizations as well under a theory that services comprise many different kinds of activities, manufacturing or not, which have financial implications upon national economies attempting to measure input and output.


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