A Conversation with the Tax Foundation’s Scott Hodge (Part 2 of 2)

Scott Hodge has been one of the country’s leading experts on tax policy, the federal budget, and government spending for decades. From 2000 to 2022, he was president and chief executive officer of the respected Tax Foundation in Washington, D.C. He is now president emeritus and senior policy advisor.

His new book Taxocracy: What You Don’t Know About Taxes and How They Rule Your Daily Life comprehensively describes and analyzes the many ways in which taxes—separate and apart from merely raising money for the government—make us do things we wouldn’t normally do, as well as not do things we would normally do.

Taxocracy also includes an informative chapter on the effects of certain lack of taxes—exemption, by policy for certain purposes, from otherwise having to pay them. “Perhaps counterintuitively, there are times when not taxing something can distort the economy as much as taxing something,” Hodge begins the chapter.

“Don’t get me wrong: this is not an argument to tax everything,” he cautions. “It is a case for tax parity and what economists call tax neutrality.”

Hodge thus examines tax-exemption for charitable nonprofit organizations in both Taxocracy and, in more depth, an important and timely recent Tax Foundation paper, “Reigning in America’s $3.3 Trillion Tax-Exempt Economy.”

“For over a century, lawmakers have exempted politically favored organizations and industries from the tax code,” he writes in the paper. “As a result, the tax-exempt nonprofit economy now comprises 15 percent of GDP, spans more than 1.8 million organizations, and manages over $8 trillion in assets. In 2019, it pocketed more than $238 billion in net income.

“The tax-exempt sector is overdue for review and reform,” Hodge continues. “The U.S. needs a principled, rules-based approach to 1) distinguish between benevolent organizations and tax-exempt businesses, and 2) level the playing field between the business activities of nonprofit and for-profit entities.”

He recommends a “reasonable rewriting of the tax-exempt rules,” writing that it “should include narrowing the definition of ‘public charity’ and subjecting all non-charitable income to the corporate tax rate of 21 percent.”

The Philanthropy Roundtable’s director of policy research, Jack Salmon, responded to Hodge’s recommendations by writing that they “overlook the distinct mission-driven focus and reinvestment practices of nonprofits,” amounting to “[p]unishing American citizens by taxing their constitutionally protected right to freely associate.”

The even-tempered and good-natured Hodge was kind enough to join me for a recorded conversation last week. In the first part of our discussion, which is here, we talk about the tax-exempt economy, narrowing the tax code’s definition of “public charity,” and subjecting supposedly charitable nonprofitdom to tax neutrality.

The almost 14-minute video below is the second part, during which we discuss the broad way in which tax neutrality should be applied to charitable nonprofits’ business income, as well as the benefits to economic growth of doing so.

“I’ve had this discussion with members of Congress,” Hodge tells me, “because there is interest in this. They have held hearings about nonprofit hospitals, they’ve done some hearings in the past about credit unions. I would like them to set down basic rules that apply broadly, rather than trying to target specific industries.”

Hodge acknowledges much recent inclination on the part of conservatives to consider policy reform having to do with nonprofits, including universities, that are woke or defend and maybe even promote Hamas’ activities. “But I would prefer to see us apply rules that are applicable across the board, so it doesn’t look like you’re cherry-picking and going after the weakest link, or the one that gets you most political attention,” he says. “I think rules have to be uniform and across the board, so that no one feels like they’re being picked on and they feel that at least there’s a level playing field that applies to everyone.”

More largely, the huge and growing nonprofit economy is “completely outside of the income-tax system,” according to Hodge. “If we’re looking at fundamental tax reform, we’ve got to consider trying to bring that back into the tax base in order to … provide fairness, more revenues, and some equal justice.”

As most of the individual provisions of the 2017 Tax Cuts and Jobs Act expire next year, he says,

there are a lot of members on both sides of the aisle who would want to increase the corporate income tax, which would be a very harmful thing to do, or increase the taxes on small businesses or what we call pass-through businesses. Both of those would be bad economics, bad tax policy. But if we expand the tax base into this nonprofit sector, we can avoid raising taxes on other sectors that would be more harmful. Provide some balance across the industries, and it would be pro-growth at the end of the day.

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This article first appeared in the Giving Review on August 13, 2024.

Source: https://capitalresearch.org/article/a-conversation-with-the-tax-foundations-scott-hodge-part-2-of-2/