Differential Taxation of Nonprofits and the Commercialization of Nonprofit Revenues

Joseph Cordes () and Burton A. Weisbrod

IPR working papers from Institute for Policy Resarch at Northwestern University

Abstract: The effects of the favorable tax treatment of nonprofit commercial activities are best understood in a framework which explicitly accounts for the interaction between differential taxation and the preferences of nonprofit executives who may be averse to commercial activity, donors whose giving may be sensitive to NPO commercial activity, and cost complementarities between NPO core activities and the secondary money raising efforts. Within this framework, differential taxation encourages NPOs to puruse commercial ventures they would otherwise avoid, by providing excess financial returns that NPOs can exploit because of their tax-exempt status. Empirical analysis using data from the 1992 SOI public use file of 990 returns indicates that the propensity of nonprofit organizations to undertake both tax-exempt and charitable activities depends on the nature of their primary mission-related output and size, on the relative importance of government vs. private contributions, and on the size of the excess return created by differential taxation of of nonprofit and for-profit business. The results also show that organizations that engage in taxable commercial activities are also more liklely to allocate joint costs in ways that reduce their taxable income.

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