How government red tape is strangling charities

[Editor's note: This story originally was published by Real Clear Wire.]

By Elizabeth McGuigan & Wayne Winegarden
Real Clear Wire

A recent Gallup poll shows Americans see the government as the top problem facing the nation. For the most vulnerable Americans this may be especially true as new research shows that excessive government burden is having a negative impact on the organizations that struggling individuals and families rely on: charities.

For the first time, a new study published by Philanthropy Roundtable ranks all 50 states on the compliance costs charities face and found that more charity regulations may mean fewer charities in a state. We noted which states impose sales taxes on charities, which states require expensive accounting audits every year, how much it costs to start a new charity and what other red tape is wrapped around charities that support the most vulnerable in our communities.

The five states with the friendliest regulatory environment toward charitable organizations are Montana, Wyoming, Nebraska, Delaware and Idaho. The five states with the most burdensome regulatory environment toward charitable organizations are Connecticut, Mississippi, New Jersey, Florida and Pennsylvania.

What we found is there is a wide range in the number and cost of regulations across the country and this variation means relatively fewer charities exist in states like Mississippi and New Jersey, while Nebraska and Wyoming have more charities serving their residents.

While one may assume that overregulating charities breaks down along red or blue state lines, this is not a partisan issue. Gov. Ron DeSantis’s Florida is among the worst for charities, while ever-red Wyoming is among the best. President Joe Biden’s Delaware ranks near the top, but its neighbor New Jersey is among the worst.

Why does this issue of overregulation matter? The vast majority of charities are small. Nearly 90% of these groups spend less than $500,000 a year advancing their altruistic missions and goals. And every dollar a charity must spend to meet regulatory obligations is a dollar that cannot go to help those in need. This means fewer resources for your local food bank or homeless shelter, fewer students helped by after-school programs, and instead, more money for lawyers and accountants.

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We know some level of oversight and accountability is important to weed out bad apples and ensure generous Americans are giving to legitimate groups. But when a small charity is faced with a $20,000 annual independent audit, for example, or subjected to the state’s sales tax, the costs of complying with excessive regulatory burdens could be the difference between existence and failure. We need to do more work to figure out the right balance between the benefits of some regulation and the costs of compliance.

What this study makes clear: The cost of overregulation forces organizations to divert personnel time and scarce resources toward compliance rather than fulfilling their charitable missions. Our goal is to arm state lawmakers and regulators with a better understanding of how their state could do better for charities.

To do this, we compared how states regulate charities along five key categories of charitable regulations including: start-up regulations, annual reporting requirements, rules for paid solicitors, audit mandates and oversight regulations.

Our analysis does not argue that any one specific type of regulation should be eliminated. Rather, that the full compliance burdens on charities should be weighed against the benefit of the regulations. While more research is required, these initial results indicate the states imposing excessive regulations may be inhibiting charitable activities in their state.

There is, in fact, a strong correlation between the states that impose more burdensome levels of regulations and the vibrancy of the charitable sector. Specifically, the states with fewer regulations tended to have more charitable organizations 68.03 charities per $1 billion in state GDP, which is 14.8% higher than the states in the bottom third of the rankings.

Our society and those in need depend on a thriving, vibrant charitable sector. We hope states can learn from each other and consider the benefits from streamlining their state regulations and eliminating unnecessary burdens as a means for promoting a more efficient and effective charitable sector.

Elizabeth McGuigan is senior director, Policy and Government Affairs at Philanthropy Roundtable and Wayne Winegarden, Ph.D. is a senior fellow in Business and Economics at the Pacific Research Institute.

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