The nonprofit sector is the American governance system's primary mechanism for addressing the social needs that the state will not fully fund and the market will not serve. Its institutional character has consequences that its charitable framing obscures.
What the Sector Actually Is
The nonprofit sector — the approximately 1.5 million tax-exempt organisations that provide services, conduct advocacy, and manage assets in the United States — is not primarily the collection of charitable organisations that the sector's public image suggests. It is a diverse institutional ecosystem that includes hospitals, universities, research institutions, advocacy organisations, cultural institutions, and the social service delivery organisations that provide the services that the state has chosen not to provide directly. The sector's tax-exempt status reflects the government's determination that these organisations serve public purposes that justify the tax subsidy that exemption provides. Whether all of the organisations claiming exempt status serve public purposes that justify the subsidy — and whether the subsidy is well-calibrated to the public purposes being served — are governance questions that the sector's charitable framing consistently deflects.
The specific governance concerns about the nonprofit sector are structural rather than individual. The large university endowments that grow tax-exempt while undergraduate education becomes less affordable raise questions about whether the tax subsidy is serving the educational purpose that justifies it. The hospital systems that claim nonprofit status while generating substantial surpluses, paying executive compensation comparable to for-profit competitors, and providing limited charity care raise questions about the relationship between tax-exempt status and public benefit. And the donor-advised funds and private foundations that provide immediate tax deductions for contributions while allowing the distribution of those contributions to be deferred indefinitely raise questions about the effectiveness of the tax subsidy as a mechanism for directing resources toward public purposes.
The nonprofit sector is the governance mechanism through which the American state outsources the provision of public purposes it will not directly fund. The governance challenge is whether the outsourcing is producing the public purposes that justify the tax subsidy — or whether it is subsidising the institutional interests of the organisations claiming exempt status while the populations whose needs were supposed to be served by the exemption receive something less.
Discussion