James Payne is President of Friends of the Shelter in Sandpoint, Idaho, and author of a recent book on the burdens of the U.S. tax system, Costly Returns, published by ICS Press.
The envelope from the Idaho State Department of Employment carne on a Friday. I remember because it was the day after our Thursday night budget meeting on the impending insolvency of our voluntary organization.
Our group runs the animal shelter in the north Idaho community of Sandpoint, providing a humane solution to the problem of unwanted dogs and cats. We return lost pets to owners, and provide for pet adoption, quarantine, and euthanasia. We also organize pet responsibility education for the schools, and a pet therapy program for residents of nursing homes.
This highly successful service is supported on a voluntary and philanthropic basis. Our only connection with government is that we charge the town for the strays its animal control officer delivers to us. These charges make up less than five percent of our revenue. The backbone of our finances are memberships, donations, private foundations, and fundraising activities. The efforts of our three paid staff members are supplemented by scores of volunteers (who logged a total of 9,317 hours in 1991). The nine board members are all active volunteers at the shelter, so they can make fully informed, sensitive decisions about shelter policies and personnel. All in all, the shelter represents a model of community action: an organization based on the principles of generosity and neighborliness, efficiently providing a needed public service.
Unfortunately, this civic idyll is threatened. The enemy is not greed, or indifference, but society’s own do-good agency, government. To a degree seldom appreciated by legislators, government taxation is undermining the public service activities of voluntary groups like ours. This will surprise those who assume that voluntary groups are exempt from taxes. Their mistake is forgetting that there are many, many taxes these days, and that non-profits are exempt from only a few.
As I noted, we are in financial difficulties. After allowing for one-time expenditures, our underlying deficit for the first quarter of 1992 was $423 monthly. This shortfall is more than accounted for by the funds that governmental units are taking away from us. The figures show that we paid out $250 a month in federal payroll taxes, and $217 a month in state worker compensation taxes.
Even our fundraising is burdened with taxes. We have a thrift shop, entirely staffed by volunteers, which resells cast-off clothing. This operation supplies a triple social benefit: it aids recycling; it supplies low-cost clothing for the needy; and it provides us with one-third of our income. Because our volunteers can’t keep track of the sales tax on each purchase, we have to deduct it from our overall earnings. This outgo came to $251 monthly.
The Idaho sales tax hits us as purchasers, too. Some politically well-connected nonprofits—including the American Cancer Society and forest protective associations—have wrangled exemptions from the legislators, but not animal shelters. Whether we buy a refrigerator to store vaccines or envelopes for a fund-raising drive, we pay an additional five percent “for the governor.” So there’s another $50 per month lost.
In addition to the $768 monthly drain of all these taxes, government’s tax reporting and depositing requirements create extra work and expense. For example, we paid $275 for tax return preparation.
Yet Another Burden
In this bleak picture there seemed to be one encouraging aspect. There was no unemployment insurance tax figuring in our list of expenditures. I took this to mean that in its heart of hearts the state was aware of our worthy public service activities and had thoughtfully lifted this burden from us. That was before I opened the envelope from the Idaho Department of Employment.
Inside, written in the menacingly incoherent language that government computers speak these days, was a document indicating a state financial demand. A morning of hectic telephoning disclosed a disaster. We were not exempt from the unemployment tax burden after all. In our case, that burden was being carried as a requirement to pay the specific unemployment claims of ex-employees. A former worker had filed such a claim and we were liable for the entire amount, $4,680.
Of course we contested the claim. We gathered data, interviewed volunteers, took statements, prepared testimony, consulted lawyers, and participated in a grueling five-hour hearing. While we were struggling against this state-imposed snare, our other activities suffered. Fund-raising was put on the back burner, and shelter supervision was shortchanged. After four months (and several bureaucratic bungles that required an appeal to our state legislator to unravel), the employment department issued its decision: we still owed the $4,680. The burden doesn’t even end there. In order to avoid such catastrophic bills in the future, we shall have to sign up to be taxed on a regular basis for the unemployment system; this will add another $700 a year to our costs.
To put these sums in perspective, when volunteers like myself sit at a donation table in the Safeway, we do well to raise $20 in a two-hour shift. Our July ice cream social, which drew on the generosity and sacrifice of 34 volunteers, 27 cake donors, and four business donors, raised $1,041.49. This amount, the reader will notice, was less than one-quarter the amount the state of Idaho took from us in the unemployment claim. How long can the idealism and morale of our volunteers withstand this sinister arithmetic?
Should lawmakers try to help voluntary groups by giving them more tax exemptions? The solution is not this simple. For one thing, exemptions usually increase the tax compliance burden, since they require recordkeeping and justification. (Those who itemize deductions will appreciate the point.) For another, more exemptions for non-profits would exacerbate the problem of unfair competition with the for-profit sector. After all, ordinary businesses also provide needed community services. Government shouldn’t be making life difficult for the animal shelter, but the solution is not an intensified war against shoemakers, dentists, and plumbers.
What our lawmakers have to realize is that taxation, for whatever well intentioned purpose, always does social harm. It undermines, often unwittingly, cherished institutions and functions. Volunteer groups illustrate this truth. Politicians pay lip service to generosity, self-help, and community problem-solving. Yet with their tax programs they are driving nails into the coffin of American voluntarism.
James L. Payne
Dr. James L. Payne is a research fellow at the Independent Institute and author. He earned his PhD in political science from the University of California at Berkeley, and he has taught political science at a number of universities including Yale University.