Why is tax status so important?

Many donors think that 501c3 status (or being on the road to getting 501c3 status) shows whether or not a group is really committed to their mission, professionalism, and fiscal responsibility. And of course, it seems only fair that an organization working for the public good should get a break on taxes when they are not out to make a profit. By that token, donors and foundations deserve to be rewarded with a tax break for their charitable motives, too. Most folks take it as a given that there should be a link between donating money, serving the public good, and tax status.

On the other hand, here are a few questions and issues we’ve been thinking about:

  • Looking back at the long history of destructive government intervention in social justice movements (for example, COINTELPRO), are there disadvantages and even dangers to inviting the kind of government oversight that 501c3 status requires?
  •  To become a 501c3, a group must take on specific organizational structures, like a board of directors. Some of these structures are from the corporate world, and while they may work well there, are corporate structures the best form for getting collective, community-based work done? (See The Revolution Will Not Be Funded for stories about how becoming a 501c3 and applying for foundation funding got in the way of many groups’ radical work.)
  • Using 501c3 status to decide if a group is qualified for funding encourages us to look to the government and to foundations to determine what accountability and legitimacy look like. But if our goal is social change, shouldn’t the communities that a group serves be the ones to decide what work is truly accountable to them? Who are the real experts when it comes to justice? Who is most affected by the issues a group is addressing? And who has a vested interest in keeping things the way they are?
  • Who benefits most from the charitable giving deduction? Short answer: the wealthy. In order to claim this write-off on your taxes, you must itemize your deductions instead of using the standard deduction. In 2013, the standard deduction was $6,100 for an individual. That means that unless you are giving away a lot of money, or you have other tax-deductible expenses that you can itemize (like paying a mortgage, business costs, or medical bills), the standard deduction will usually save you more. The Tax Policy Center estimated that about 70 percent of taxpayers claimed the standard deduction on their 2010 tax returns. This is one of the reasons why wealthy taxpayers in higher tax brackets are much more likely to itemize than lower-income people in lower tax brackets. According to the Tax Policy Center, just 16 percent of people in the 10 percent tax bracket itemize as opposed to 89 percent of people in the 35 percent tax bracket. The charitable-giving deduction also disproportionately benefits the wealthy. When taxpayers in the 35 percent bracket donate $100, they get $35 dollars back. Meanwhile taxpayers in the 10 percent bracket only get $10 back from that same $100 donation.
  • Most foundations won’t even consider a group for funding unless they have 501c3 status or a fiscal sponsor. This focus on government- approved tax status (both for their grantees and for the grantors themselves) is just one of the many ways that institutional philanthropy controls and restricts the work of social change. We can’t forget that institutional philanthropy in the US was not created to support social change. Like most institutions, it was designed to protect privilege and shelter assets. For example, until 1969, private foundations weren’t even required to give any money away. And today, foundations only have to spend 5% of their assets a year from which they can also deduct operating expenses. Philanthropy may be about charity, but it is also about power, especially the power that comes with deciding what to fund. And the bulk of that philanthropic power in this country belongs to the wealthy. Which brings us back to the question: who are the real experts when it comes to justice? And who has a vested interest in the status quo?

All the restrictions and requirements it takes for a group to maintain 501c3 status and apply for foundation funding keep folks busy. So we have to ask: who benefits from making it harder for these groups to fight for systemic change? It seems to us that the answer is people with power who’d like to make sure things stay just as they are.