When I began this blog–nearly twenty years ago!–I would occasionally run out of likely subjects, and ask my husband to suggest something. That problem has vanished; today, the challenge is to choose which aspect of a tumultuous time to consider. I share this small dilemma because today’s post is centered on a problem that probably doesn’t rank high in the universe of challenges we face, but still deserves attention–and ultimately, a remedy.
That problem is the definition of nonprofit.
Back before I decamped from legal practice to join academia, I was aware that a good lawyer could often turn what was really a for-profit endeavor into a nonprofit organization. Assuming an arguable existence of a public good, it was possible to create a corporation that didn’t have a positive bottom line. You would simply transfer amounts that would otherwise be taxable profits into overhead costs, mainly salaries and perks for those in charge, and avoid those pesky taxes.
That clever lawyering has given us (among other things) “nonprofit” hospitals paying executive salaries of over a million dollars a year (Hospital CEO’s are paid an average of I.3 million according to a recent study from Rice University.)
The effects of that blurry line between for-profit and nonprofit was the subject of a recent opinion piece in the Washington Post that called it a 2.8 trillion dollar tax shelter. As the author noted, a growing number of supposed “charities” have become big businesses.
Granted, many charities are authentic and truly benevolent, but it is also true that the nonprofit sector is dominated by companies that are exempt from the tax obligations that burden their virtually indistinguishable for-profit competitors. According to the linked essay, “the commercial revenue generated by these nonprofits totaled $2.8 trillion in 2023, nearly three times the amount nonprofits receive from donations and government grants.”
In 1909, Congress exempted charitable organizations from the corporate income tax, intending to protect “small fraternal societies providing insurance to widows and tending to the poor.” But the exemption also applied to mutual lending and insurance companies, which opened the door to exempting other “businesslike” companies. As a result, the “past century of special-interest lobbying has transformed a modest carve-out into a sprawling network of billion-dollar enterprises that look, act and compete like businesses — while enjoying privileged tax status.”
Consider nonprofit hospitals and health care plans: In 2023, they generated $1.3 trillion in revenue and nearly $45 billion in tax-free profits. The largest, Kaiser Foundation Health Plan and its affiliated hospitals, recently announced over $127 billion in revenue in 2025 — more than many of America’s largest for-profit companies — yet paid no corporate income tax on more than $9.3 billion in net income. The justification? In exchange for their tax exemption, nonprofit hospitals are supposed to provide charity care for the poor. However, studies consistently find that tax-exempt hospitals don’t provide more free or discounted care to low-income patients than their taxpaying competitors.
Or take AARP, an advocacy group for older Americans, which earned $9.9 billion in tax-free royalties in 2024 by licensing the use of its name to for-profit companies. AARP signed a sponsorship deal last year with the Washington Nationals to place its logo on players’ uniforms. Hardly the action of your neighborhood nonprofit.
Other organizations that fall into that category include the PGA–which pays no income taxes on the hundreds of millions it makes from television or tournament sponsorships, and the U.S. Tennis Association, the U.S. Polo Association, the WTA Tour, the Breeder’s Cup and the National Hot Rod Association. The list also includes profitable award shows like the Academy of Motion Picture Arts and Sciences Oscars ($147 million tax-free in 2023), and the Grammys (nearly $93 million from TV, sponsorships and ticket sales in 2024.)
Then there’s the credit union industry, which was originally exempted to serve working-class people of “small means.” They are now indistinguishable from commercial banks–in fact, over the past decade, they’ve purchased nearly 100 commercial banks, converting taxpaying businesses into tax-exempt ones.
We can exempt genuinely charitable endeavors like food banks, homeless shelters and others serving the needy from taxation, but it is long past time to distinguish between truly charitable endeavors and what the essay calls “commercial enterprises wearing nonprofit clothing. If it walks and quacks like a business, tax it like one.”
There is serious money at stake. The essay points out that taxing the net business income of these faux nonprofits at the standard 21 percent corporate rate would raise $51 billion annually — and would do so without raising rates on anyone currently being taxed.
It’s past time to treat these pretenders like the for-profit businesses they really are. Put this reform on your list of things we must do when we emerge from our current nightmare.
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