A Modest Proposal: The “Self-directed Tax”

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March 19, 2012; Source: Nonprofit Law Prof Blog

The cutting edge of ideas on nonprofit law shows up pretty regularly in the Nonprofit Law Prof Blog. This post tells readers about a proposal by. Prompted by the debates about the rights of religious organizations to engage in political activity, Afield proposes a solution that would apply to all 501(c)(3) organizations—a compromise between the “no politics” and the “let’s jump in” positions. As summarized in the abstract of Afield’s Nevada Law Review article, the proposal is that “501(c)(3) organizations be permitted an increased amount of political campaign activity in exchange for paying a tax referred to as a ‘self-directed tax.’”

Afield’s idea is complex. As he explains in the Law Review piece, “The self-directed tax would initially be a tax like any other—an income tax levied against all of the potentially taxable income of an organization that would currently be classified as tax exempt. What would make this tax unique is that the organizations electing the tax would designate how the government spends the tax dollars these organizations contribute. Although these organizations would not have unfettered discretion to mandate that the government spend their tax dollars, they could select which areas of existing government spending the government should support with their tax dollars. A similar rule could be applied to those who donate to the electing organizations. Rather than allowing a tax deduction for the donation, under the self-directed tax the donor would be denied a deduction for the donation but would be permitted to allocate the tax due on the donated funds in a similar fashion.”

How might the taxed 501(c)(3) organizations direct the government to spend the tax? Afield explains in a footnote: “For example, one religious organization electing the tax might prioritize aid to the poor and would direct that its tax dollars be spent for governmental programs that provide aid such as food stamps, while another religious organization electing the tax might prioritize providing adequate health care and would direct its tax dollars towards programs like Medicare and Medicaid. An argument could certainly be made that the list of potential government spending choices for self-directed tax dollars might have to be restricted to a list of potential areas in which it is more likely that the charitable organizations would have superior knowledge to the government regarding how spending should be allocated.”

Afield thinks the self-directed tax for 501(c)(3)s and religious organizations engaged in political activity is superior to the option they might have otherwise used, the creation of a 501(c)(4) social welfare organization which is permitted to do partisan political activity. It is superior, he says, because the (c)(4) option requires (c)(3)s to set up nominally independent entities that might otherwise “dilute” the charity’s message. He doesn’t think self-directed-taxed (c)(3)s would be corrupted by political opportunists the way 501(c)(4)s have, as we have noted many times in NPQ.

Does this self-directed tax reasonably allow public charities and religious institutions a modicum of political engagement without undermining their charitable purposes and priorities? Or is this the nose under the camel’s tent for turning charities into increasingly political actors with yet another loophole in the tattered structure of campaign finance reform?—Rick Cohen

  • John Sayles

    Here’s a vote for the camel’s nose under the tent. Better to change the rules so that political advocacy organizations are not tax exempt.