Tax Advantaged

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Among those hardes hit was veterinarian Peter Prescott, who made fighting the humane societies something of a full-time campaign as executive director of the state veterinary association. His proposed remedy, presented to the Michigan legislature, would have required the humane societies to set up separate tax-paying corporations for their fee-for-service clinics and other commercial ventures. The idea sounded fair enough to several members of the Michigan House of Representatives when Prescott began shopping his idea around. But an avalanche of mail from Michigan's animal lovers soon hit the capitol, and when it came time to look for a sponsor, there was none to be found.

"Legislators don't want to stick their necks out just to get them chopped off," Prescott concludes. "What's in it for them?" There are, he points out, only 1,200 veterinarians in the whole state; dog and cat owners number in the millions.

And so it goes. At last count, there were more than 900,000 tax-exempt organizations operating in the United States, employing 10% of the American work force and generating an estimated $300 billion in revenues each year. That kind of money doesn't come from spare change dropped in Salvation Army tin cups. And, to hear it from small-business owners, too much of it comes out of their hides. Across the country, nonprofits -- many of them under financial pressure to become more "businesslike" in their management -- have begun peddling everything from packaged vacation tours to prescription drugs, offering services that range from landscaping to catering of weddings. And without some change in government policies, most experts expect the trend will only accelerate.

All this came to something of a head at last summer's White House Conference on Small Business, where delegates voted "unfair competition" their number-three concern, right after liability insurance and mandated benefits. The issue reached a rhetorical crescendo as the delegates stepped up to the microphones to swap horror stories. But their proposed solution, stripped to its basics, urged only that unfair competition "be prohibited." The details were left to others.

The problem, of course, is with the details -- defining precisely what unfair competition is and what government can do about it. For even if elected officials were inclined to begin curbing the entrepreneurial instincts of the nation's nonprofits, writing that inclination into law is no mean feat. The policy that takes aim at tax-exempt veterinary clinics and subsidized computer stores can't be so broad that it threatens Girl Scout cookie sales, the weekly church ham-and-bean supper, or the Rotary Club car wash. And while government can deny tax breaks to certain nonprofit enterprises, it cannot deny them their captive audiences or their breakeven pricing strategy or the "halo effect" that comes with nonprofit status. Any regulation, to be effective, would have to be applied case by case, industry by industry -- a process that would surely be time-consuming and contentious.

Right now, federal law requires only that nonprofit organizations that run for-profit operations pay an "unrelated business income tax." But even Internal Revenue Service officials admit the tax is difficult to administer. One problem is separating the costs and expenses of the profit and nonprofit aspects of a single organization. Another is defining exactly what activites are "unrelated" to the organization's original purpose. As a result, only 28,000 nonprofits bothered to file corporation income-tax forms last year, paying just $153 million to the federal government. "This is not a big area for compliance," admits an IRS spokesperson.

Jerry Brong is beginning to understand why. Responding to intense lobbying by Brong and others, the state legislature passed a so-called unfair-competition law that has been the rallying cry of small-business groups in several states. The Washington initiative calls, among other things, for state colleges and universities to set up committees to review and regulate their retail operations and report their findings back to the statehouse by year's end.

Brong, of course, hopes the measure will bring some relief to his business and some reason to the issue. But he also sees it raising more questions. When colleges allow local residents and staff free access to their gymnasiums, for instance, does that impinge on local health spas? And if a college sells hot dogs at football games, must it now award that contract to an outside vendor? Can universities establish their own day-care centers for staff and students with children, or would they be unduly interfering with commercial centers?

And how would a law prohibiting unfair competition impact the university's computer store? Who will determine the overhead that should be counted against its operations -- the cost of electricity going into that store, or the portion of the dean's salary, or the property tax that might otherwise have been paid on that square footage? And what are the real payroll costs if the store's staff members are university employees covered under the state medical and pension plans?

Like most political controversies, the issue of unfair competition is controversial precisely because it is difficult. If it were wasy, no doubt somebody would have already resolved it. In fact, you might say that, despite its number-three ranking at the White House Conference on Small Business, the chances for prompt action on this issue are not much better than for, say, conference recommendation number four. That's the one calling for a balanced federal budget.

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