Tuesday, September 28, 2021
Ellen P. Aprill (Loyola-L.A.) & Lloyd Hitoshi Mayer (Notre Dame; Google Scholar), Tax Exemption Is Not a Subsidy — Except for When It Is, 172 Tax Notes Fed. 1887 (Sept. 20, 2021):
In this report, Aprill and Mayer argue that there is no uniform answer to the question whether a tax exemption is a subsidy, and they urge policymakers and exempt organizations to note the distinctions when changes to laws or other guidance regarding exemption are under consideration.
As [Daniel] Halperin’s work demonstrates, broad assertions that a tax exemption provides a subsidy are inaccurate. Contrary to the oft-quoted language from Supreme Court opinions, whether the exemption from federal income tax enjoyed by most nonprofits operates as a subsidy is not amenable to a single answer. Instead, the answer depends on a variety of factors, including whether the nonprofit has members who benefit from its activities; whether the nonprofit has income other than contributions from its members to which the exemption extends; whether tax is effectively deferred by the exemption and, if so, whether that deferral is financially valuable to the nonprofit or its members; and whether the nonprofit’s activities closely resemble the activities of taxable, for-profit businesses.
Often, references to the subsidy afforded nonprofit or tax-exempt organizations are in fact referring primarily to nonprofit organizations exempt under section 501(c)(3) and rely at least implicitly on the charitable contribution deduction, which has been consistently treated as a subsidy. That is, tax exemption is included as an additional subsidy without much thought. However, focusing only on section 501(c)(3) organizations, which permits this elision, is too narrow an approach.
As this report describes, some aspects of exemption further subsidize both section 501(c)(3) and other EOs. But the extent to which they do so will vary from organization to organization. Some organizations have considerable investment income, others none. Some organizations benefit from deferral; others do not. Any glib assertion that a tax exemption constitutes a subsidy misunderstands and mischaracterizes the tax-exempt sector. Making these distinctions should not be a purely academic exercise. Policymakers — and EOs themselves — should acknowledge and take into account these distinctions when changes to statutes, regulations, or other guidance involving tax exemptions are under consideration.