Concerns about nonprofits’ growing clout

The U.S. nonprofit sector has survived surprisingly well since the 2008 financial crisis. Even during the depths of the downturn, its revenue rose steadily. Today, nonprofit sales of goods and services to households amount to almost $1 trillion a year – or more than 5 percent of gross domestic product.

This continues a longer trend. From 2000 to 2010, nonprofit revenue increased by more than 40 percent in inflation-adjusted terms, Amy Blackwood, Katie Roeger and Sarah Pettijohn of the Urban Institute estimate.

Nonprofit employment has increased, too – by almost 2 percent from 2007 to 2009, according to an analysis by Lester Salamon, S. Wojciech Sokolowski and Stephanie Geller of Johns Hopkins University. In the for-profit sector, in contrast, employment fell by almost 4 percent. As the authors conclude, “nonprofits have been holding the fort for much of the rest of the economy, creating jobs at a time when other components of the economy have been shedding jobs.”

One in 10 workers outside government now works for a nonprofit, and that number is projected to keep rising. The 2013 Nonprofit Employment Trends Survey indicated that 44 percent of nonprofits intend to create new positions this year, while just 20 percent intend to freeze hiring, eliminate positions or gradually reduce staff.

What exactly, you may be wondering, does the nonprofit sector do? The best data we have come from the Internal Revenue Service; even though nonprofits don’t pay taxes, the large ones are required to file informational returns. These records show that about 60 percent of nonprofit revenue is received by hospitals and other health-care providers. Education accounts for an additional 16 percent.

So roughly three-quarters of what nonprofits do involves either health care or education. This helps explain why the nonprofit sector weathered the recession better than the private sector did.

For-profit providers of health care and education also expanded during the recession, the Hopkins study on employment trends found. But the for-profit sector as a whole contracted, because it is not as concentrated as the nonprofit sector is in health care and education.

The ultimate question is whether we should welcome or be concerned about the growth of nonprofits. The answer is linked to whether we want to spend more on health care and education. To my mind, as the United States grows richer, we should welcome spending more on health care and education – but only if we obtain better value from the money we spend.

Revolutions are under way in both sectors. In health care, as I have written, a shift away from fee-for-service payment and progress toward digitization may produce substantial changes over the coming decade. Digitization is also occurring in primary and secondary education, time in the classroom is increasing, and teacher performance is being more rigorously evaluated; in higher education it’s possible that massive open online courses, such as those provided by Coursera and edX, will force universities to wring more value from their tuition. So there are at least some grounds for hope that we’ll get better value for the money we spend through nonprofits.

Even so, the role of nonprofits in providing those services may be a concern. Sen. Charles Grassley has long called attention to the risk that tax exemption may give nonprofits an undue advantage and that their activities may not be sufficiently distinguishable from what for-profits do to warrant the tax break. I’m not sure that Grassley is right, but I’m also not sure he is wrong. If we as a nation ever get around to tax reform, these questions should be part of the discussion.

We should at least adopt one of Grassley’s more modest ideas: to estimate how much tax revenue is forgone by the breaks for the nonprofit sector. No one knows, in part because the Joint Committee on Taxation doesn’t consider the exemption from corporate income taxation for most nonprofits to be a tax expenditure. The rationale for this – that nonprofits don’t compete with for-profit businesses – may not be entirely true in practice. Congress should at least find out what the figure is.

Peter Orszag is vice chairman of corporate and investment banking and chairman of the financial strategy and solutions group at Citigroup Inc. and a former director of the Office of Management and Budget in the Obama administration.

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