TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Wednesday, February 6, 2019

Hackney Presents Section 501(C)(4) Social Welfare Organizations And Tax Exemption Today At UCLA

Hackney (2019)Philip Hackney (Pittsburgh) presents Dark Democracy? Section 501(C)(4) Social Welfare Organizations and Tax Exemption at UCLA today as part of its Colloquium on Tax Policy and Public Finance hosted by Jason Oh:

Karl Rove’s Crossroads GPS, The AARP, and the American Civil Liberties Union, Inc. all take advantage of the tax benefits of a “social welfare organization” as defined in Internal Revenue Code section 501(c)(4). Though often referred to as “dark money” organizations, because these ideologically active organizations need not publicly disclose their donors, many large health insurance organizations and homeowner’s associations use this tax-exempt structure as well. A social welfare organization must be “operated exclusively” for the “promotion of social welfare.” In 2016, more than 80,000 of these organizations were registered with the IRS, and as an aggregate they earned over $86 billion in revenue. Should we exempt these organizations from the corporate income tax?

I utilize a social choice function analysis, instead of social welfare function or a fairness critique. By social welfare function, I mean an approach that suggests a tax policy is desirable or not based on whether it is the better plan to enhance aggregate economic welfare. We could call this a “best-results” theory. By fairness critiques, I mean those that primarily focus on whether a tax policy unfairly advantages some group in an economic sense over another. By social choice function critique, on the other hand, I mean a critique that focuses on whether a tax policy enhances the self-governing nature of our democracy or not. In other words, does the policy give more individuals a political voice over what the group is going to decide? We could also call this a “popular-will” theory.

This Article shows that a social choice function analysis enhances the analysis when combined with contract failure and government failure. It suggests that much of the field of social welfare organizations including advocacy organizations and health insurance organizations would be best as taxable entities rather than tax exempt. It provides some support for exempting from tax smaller, truly community based, open organizations such as Kiwanis and Rotary. Intriguingly, it may justify exemption in the case of a true civil liberty defending organization such as the ACLU. Nevertheless, politically this is likely a difficult line to hold. In any case, reducing the number of organizations that fit into this category and making them taxable would likely improve the function of the IRS and its perception as a fair democratically based organization by removing from its jurisdiction the necessity to make toxic political calls.

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