Wednesday, April 04, 2007

New Tax Sources: Nonprofits under Scrutiny

In its never-ending quest for revenues, our government is looking at some interesting questions about the scope of tax-exempt status. Today's electronic update for the BNA Daily Tax Report reports a recent letter by Iowa's Senator Grassley that suggests that universities may now be under scrutiny. In particular, all those sports dollars may indeed become a target for the federal purse.

First, a few budget facts. Federal budget receipts grew substantially in FY 2006, with individual tax receipts up more than $116 billion over FY 2005 and corporate taxes up by more than $75 billion. These increases of over 12 percent (individual) and 27 percent (corporate) over the prior year are substantial. Moreover, they occurred in an environment of lower tax rates, as the Bush tax cuts from 2003 are continuing to generate growing government receipts. (Data on this topic can be found at:

Nevertheless, we still spend more than we are taking in. Budget deficits are shrinking, but they are still large in an absolute sense. The deficit for FY 2006 was 248 billion, some 71 billion dollars lower than the prior year.

Lately politicians have been seeking out friendlier territory in which to cut the deficit. The "tax gap" is getting a lot of attention. An IRS study in 2005 indicated that the tax gap – the difference between what is collected and what should be collected – is over $250 billion based on 2001 data. See a news release on this study, which can be found here:,,id=137247,00.html
It is likely to be even greater today. Eliminating the tax gap seems like an easy political sell – after all, we just want people to pay what they are supposed to pay. However, it will potentially mean a more aggressive IRS, not this kinder, “customer-service” oriented organization that some would like. That may not be so popular - especially if you are on the receiving side of their scrutiny.

Another way to close the budget shortfall is to look at the exemptions currently granted in the tax system -- in other words, expand the tax base by including entities that have previously been outside the income tax system. Nonprofit hospitals were previously discussed in this blog as targets. They are competing with for-profit hospitals in providing patient care, but without the same tax obligations. Senator Grassley has also been asking questions about this issue, and it makes sense to find out whether the public is getting its money’s worth for all the foregone revenues taken in by these enterprises. (For example, are nonprofits doing better at indigent care than their for-profit counterparts?)

Senator Grassley is now on to a new nonprofit topic: universities. In particular, he is asking questions about university athletic programs. As we have recently seen in the news media, athletics involve big money. Coaches can make multi-million dollar contracts, based in part on the large market forces behind ticket sales, licensing agreements, and fan benevolence to college sports teams. Of course, the coaches get taxed on their income, but what about the share retained by the University? And what about tax-deductible contributions by boosters for things like the right to buy season tickets? Query whether all of this should fall behind the curtain of tax exemption. Of course, some sports like football and basketball end up subsidizing lesser sports, which may not attract large public following. That may be a good thing. But when resources are limited, is that where federal revenues should go? Should tax rates be raised on everyone so that a few people can play Lacrosse, even if it is very educational? And what about the consequences of raising taxes on individuals, who are now less able to afford to pay for sports programs for their own children? This is really quite complex, and it affects all of us at some level.

Senator Grassley is asking the CBO to study this issue. A copy of his letter regarding university issues as well as another letter on nonprofit hospitals were made available in today’s BNA Daily Tax Report update. (Sorry – subscription required. However, they may also appear on the Senator’s website soon.) This move may not be politically popular - especially with the crowd that would rather tax other people to fund the activities they prefer. However, the Senator is asking a fair question -- and it will be interesting to see how the CBO approaches this issue. It will also be interesting to watch how the public reacts to this issue.


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