Nonprofit Businesses and the Leaky Bucket of US Tax Policy

America raises more than $5 trillion in tax revenues annually, but to borrow a phrase from the late economist Arthur Okun, the US tax code is a “leaky bucket.” Over the decades, lawmakers have created more than 170 exemptions, deductions, and credits in the tax code that add up to roughly $1.9 trillion in forgone tax revenues, according to Congress’s Joint Committee on Taxation (JCT).^[1] 

But even these staggering figures understate the number of leaks in the government’s fiscal bucket. JCT’s annual accounting largely ignores more than $2.8 trillion in business-related commercial income earned by nonprofit organizations that goes untaxed. This includes the more than $1.1 trillion in commercial income earned by nonprofit hospitals alone, and billions more earned by tax-exempt universities, sports leagues, health insurers, golf clubs, investment firms, consultants, engineering firms, business leagues, and electric utilities. Nearly all this commercial income goes untaxed.

It is critically important that JCT account for the revenue lost to exempting this business income from tax. By my estimates, the total amount of tax revenues forgone from exempting nonprofit business income is $51 billion annually. Lawmakers need a full accounting of the revenue leaks in the federal tax base if they are to effectively address the rising national debt or take steps to make the tax code simpler and less economically harmful. 

By putting hard numbers on the universe of nonprofit business activity, JCT can also begin a dialogue over what activities truly deserve to be considered “charitable”—and therefore exempt from taxation—and what are the activities of commercial enterprises masquerading as nonprofits.

What Counts as a Tax Expenditure 

Since 1972, JCT has published an annual report documenting the number of exemptions, deductions, and preferences in the tax code and estimating the amount of tax revenues forgone by those preferences. 

These various tax breaks and preferences are called “tax expenditures” because they reflect the notion that certain tax provisions are the equivalent of spending through the tax code. For example, a $2,000 tax credit for dependent children or a $7,500 tax credit for purchasing an electric vehicle is seen as delivering the equivalent of a cash payment to eligible taxpayers by lowering their tax bill by the prescribed amount. 

JCT’s 2024 report lists more than 170 specific tax expenditures with a total value of $1.9 trillion in forgone tax revenue. Some of the more common tax breaks are the mortgage interest deduction, the charitable deduction, and the state and local tax deduction. Lesser-known provisions include LIFO (the last-in, first-out inventory method), the proration for property and casualty companies, and the exemption from certain imputed interest rules. 

Interestingly, tax breaks benefiting individuals are the most numerous and generous, totaling $1.7 trillion, while those benefiting corporations total roughly $180 billion. It seems counterintuitive that the amount of tax breaks for corporations is so comparatively small, but JCT is not accounting for the large amount of business income earned by nonprofit entities that lawmakers have decided to exempt from taxation. These exemptions fit the very definition of a tax expenditure, however, and should be included in JCT’s annual study.

Many benevolent organizations survive solely on gifts from donors, but in the aggregate, charitable donations comprise only about 12 percent of the $3.7 trillion in annual revenues generated by tax-exempt organizations. As table 1 shows, more than $2.8 trillion of nonprofit income comes from business or commercially generated sources, such as insurance payments, ticket sales, TV broadcast rights, royalties, licensing fees, memberships, payments from Medicaid and Medicare, government contracts, tuition, rents, advertising, sponsorships, and investment returns. 

Only a small portion of this business-related income is subject to the Unrelated Business Income Tax (UBIT). In 2018, for example (the most recent data available), nonprofits paid $691 million in UBIT on $3.1 billion in taxable unrelated business income.

Most commercial income goes untaxed because it is justified as “related” to the core mission of the nonprofit organization. Regardless of how related this income may be to the mission of these exempt organizations, it is income that lawmakers deliberately excluded from UBIT and that would be taxed if it were earned by a for-profit firm, such as a C-corporation. Since 1909, when the corporate tax code was enacted, lawmakers have chosen to exempt numerous business activities from tax. Less often, lawmakers have rescinded the tax exemption for some industries, such as nonprofit mutual banks and building and loans, that were thought to be competing unfairly with private firms. Thus, these exemptions are clearly politically determined diversions from the tax code and should be included in the tax expenditure report.

Inconsistent Treatment of Nonprofits

In a 2005 study on the history of the federal tax exemption for charities and tax-exempt organizations, JCT observed that lawmakers have never developed a set of guiding principles for why they have exempted some industries from tax and not others: “There is no unifying theme or singular principle that explains tax exemption for the many diverse organizations in the exempt sector.” 

JCT’s explanation for why it includes some tax-exempt businesses in its tax expenditure report and not others reflects this ambiguity. In the discussion of corporate tax expenditures on page 8 of the 2024 report, JCT walks through three reasons why it considers some tax-exempt business activities to be tax expenditures and others not. Considering the growth and magnitude of nonprofit business income, it is worth revisiting these explanations. 

Below are JCT’s explanations followed by my analysis.

1. Certain non-501(c)(3) tax-exempt organizations with business analogues are considered tax expenditures

According to JCT, 

The tax exemption for certain tax-exempt organizations that are not described in section 501(c)(3) and which have a direct business analogue or compete with for-profit organizations organized for similar purposes is a tax expenditure.¹⁹

Footnote 19 further explains that “these organizations include small insurance companies, mutual or cooperative electric companies, State credit unions, and Federal credit unions.”

Analysis. Credit unions are the only exempt businesses that JCT has constantly included in the tax expenditure report since 1972. The 2024 report also lists tax expenditures for some small property and casualty insurance companies as well as a special deduction for Blue Cross and Blue Shield companies. 

While footnote 19 references mutual or cooperative electric companies, the report does not appear to include estimates for tax-exempt electric companies or other utilities. Yet the Internal Revenue Service (IRS) 2024 full extract 990 dataset shows more than 2,900 cooperative public utility companies that fall under 501(c)(12) of the tax code. They had combined revenues of more than $76 billion and net income of nearly $1.6 billion. These profits should be considered tax expenditures. 

Also, JCT does not appear to include a tax expenditure for some of the larger 501(c)(8) fraternal insurance and financial companies such as Thrivent Financial for Lutherans, with annual revenues of more than $10 billion, the Knights of Columbus, with nearly $2.5 billion in revenues, or the Modern Woodmen of America, with $1.7 billion in revenues.

Thrivent’s website boasts that it has grown to be a Fortune 500 company with more than $194 billion in assets under management. Thrivent’s services include investment advice, insurance, annuities, and, recently, banking. Each of these services competes directly with for-profit firms, so these fraternal organizations ought to be included in the tax expenditure report.

2. Trade associations and certain cooperatives are not considered tax expenditures

According to JCT, 

The tax exemption for certain nonprofit cooperative business organizations, such as trade associations, is not treated as a tax expenditure just as the treatment of for-profit passthrough business entities is not treated as a tax expenditure.

Analysis. JCT is likely referring to organizations within sections 501(c)(4) through 501(c)(7) of the Internal Revenue Code, which would include social welfare organizations, trade associations, business leagues, and recreation clubs. 

However, comparing these organizations with for-profit passthrough businesses seems misplaced. For-profit firms such as S-corporations and LLCs pass their profits through to the owners, who then pay taxes on that income on their 1040 individual tax returns. This is clearly not the case with trade associations because (1) the profits of nonprofits may not inure to—or be shared with—shareholders, members, or individuals, and (2) any profits generated by these organizations are generally retained as reserves or net assets. 

The ability to retain tax-free earnings has allowed many of these organizations to become large and profitable businesses that would otherwise pay income taxes if they were traditional C-corporations. Many compete directly with for-profit firms in similar industries. 

• Some of the largest 501(c)(4) organizations are health-related firms such as Delta Dental Plans, which has over 30 state entities. Delta Dental of California is the largest of the company’s affiliates. Its 2023 990 reports total revenues of $6.1 billion and net income of $303.9 million, with more than $2.8 billion in net assets. Delta Dental’s various state entities had a combined income of more than $18 billion in 2023. 

• AARP is another highly profitable 501(c)(4) business with more than $1.7 billion in annual revenues. AARP’s 2023 990 reported more than $1.1 billion in tax-free royalty income from licensing its name and logo to insurance companies. This is the organization’s largest source of income and dwarfs the $289 million the organization receives in membership dues. AARP did report more than $167 million in unrelated business income from such sources as advertising, digital revenue, and licensing fees. After expenses, it booked only $5.7 million in taxable income. AARP recently signed a sponsorship deal with the Washington Nationals baseball team to have the AARP logo placed on the players’ uniforms and on the field. Hardly the action of a traditional nonprofit.  

• The largest 501(c)(6) business league by revenues is the PGA Tour, which hosts and sponsors professional golf tournaments and advances the “common interests of touring golf professionals.” In 2023, the PGA Tour reported more than $1.8 billion in annual revenue, including $730 million generated by media rights alone. It reported net assets of $1.2 billion. By all accounts, the PGA behaves as a commercial sports and entertainment business. 

• Many other professional sports leagues are 501(c)(6) organizations, including the United States Tennis Association, ATP Tour, Ladies Professional Golf Association, WTA Tour, United States Polo Association, the Breeders’ Cup Limited, and National Hot Rod Association. All these organizations receive most of their income from broadcast and sponsorship revenue that is exempt from tax.

• The wealthiest 501(c)(7) “social club” is the Desert Mountain Club near Scottsdale, Arizona. Membership in this exclusive golf and lifestyle community is by “invitation only.” The Club’s real estate listings include homes ranging from $1.1 million to $25 million. According to its 2023 990, the Club booked more than $100 million in total revenue, $12.3 million in profits after expenses, and $145 million in net assets. The Club’s 990 does report $3.1 million in unrelated business income from rent, investments, and miscellaneous golf income. 

• Located outside Washington, DC, the tony Congressional Country Club is also a 501(c)(7). Congressional was founded in 1921 by members of Congress and titans of industry such as John D. Rockefeller and William Randolph Hearst. It has hosted numerous professional golf tournaments and championships. Congressional’s 2022 990 tax return reported total revenues of more than $44 million and a rare net loss of $629,031, compared to a prior year net profit of $2.1 million. It did report nearly $2.2 million in unrelated business income from public use of Club facilities. Congressional ended 2022 with net assets of $64 million. The Club’s land—59 acres—has been “designated as an easement for the protection of a natural habitat” so it can never be developed. 

What makes much of this income especially troubling from a tax base perspective is that it is double nontax income: The donor (or payer) can deduct the payment, while the receiving organization pays no tax on the income. This is particularly true for broadcast rights, royalties, and sponsorship payments, which TV networks can deduct as a business expense, but the corresponding income is not taxed at the nonprofit level. Thus, this income is completely outside of the income tax system and should be considered a tax expenditure.

The IRS has tried several times to tax the broadcast rights or sponsorship deals of college bowl games without success. In 1977, for example, the IRS considered taxing the revenue from football bowl games but reversed itself after intense lobbying by Southern Methodist University, Texas Christian University, and the University of Kansas. In 1991, the IRS issued two rulings that corporate “sponsorship fees” for bowl games were advertising by another name and, thus, taxable. Congress later amended the UBIT rules to exempt sponsorship fees from tax.

3. JCT says 501(c)(3) nonprofit businesses are not tax expenditures

JCT seems to have determined that because 501(c)(3) charitable organizations are not tax expenditures, then charitable organizations that have business income are also not tax expenditures. At best, this seems like an anachronistic view of nonprofits because the majority of 501(c)(3) income is classified as “program service” income, which is business-related income. And many of these nonprofits receive few charitable donations and do little charitable work. 

According to JCT:

With respect to other nonprofit organizations, such as charities, tax-exempt status is not classified as a tax expenditure because the nonbusiness activities of such organizations generally must predominate and their unrelated business income is subject to tax.²⁰

Footnote 20 explains further that “the tax exemption for charities is not treated as a tax expenditure even if taxable analogues may exist. For example, the tax exemption for hospitals and universities is not treated as a tax expenditure notwithstanding the existence of taxable hospitals and universities.”

It is worth noting that JCT did produce an estimate of the value of the tax exemption for nonprofit hospitals in 2002. They estimated the tax expenditure at $2.5 billion. Interestingly, JCT did not publish this estimate; instead, it was referenced in a 2006 Congressional Budget Office (CBO) report on nonprofit hospitals and the provision of community benefits.

Analysis. These 501(c)(3) criteria may hold for traditional benevolent organizations that are largely funded by charitable donations, but they do not hold for nonprofit hospitals, HMOs, universities, and organizations such as the NCAA or the Aerospace Corporation that are funded almost entirely from business-related sources—such as insurance payments, Medicare reimbursements, royalties, rents, broadcast rights, and investment income—irrespective of any UBIT they may have.

The tax loss from the net business income of these organizations should be treated as a tax expenditure in the same way that credit unions are considered a tax expenditure. Some of the most well-known brands in the US are nonprofit businesses that receive few, or often no, charitable donations.

• According to the IRS full extract 990 dataset for calendar year 2023, the total income of nonprofit hospitals was $1.3 trillion in 2023, 92 percent of which was generated from program services revenue. This would include income from patient payments, insurance companies, Medicare and Medicaid payments, and royalty income. Income from gifts (which could include government grants as well as private donations) totaled just 4 percent of their revenues. In 2023, nonprofit hospitals enjoyed total net income of nearly $45 billion, yet studies have found that nonprofit hospitals do less charity care than for-profit hospitals.
• Kaiser Foundation Health Plan Inc. is the largest single nonprofit organization in the US, with over $75 billion in revenues in 2023. All of Kaiser’s income that year was reported as program service income from sources such as member dues, Medicare revenue, supplemental revenue, and non-plan and industry revenue. Kaiser Health Plans booked a $745 million surplus in 2023 and a $645.6 million deficit in 2022.
• Kaiser’s sister organization, Kaiser Foundation Hospitals, booked over $32.7 billion in revenues in 2023, 96 percent of which was program services income. Kaiser Hospitals reported a surplus of $2.1 billion in 2023 and a surplus of $869 million in 2022.
• The nonprofit Aerospace Corporation reported $1.3 billion in income in its 2022 990 tax return. Yet 99.7 percent of its revenue that year was generated from commercial and government contracts. Aerospace received just $100,209 in charitable gifts or grants and booked a $35.2 million surplus in 2022. Aerospace is clearly a commercial business that was somehow granted a 501(c)(3) designation.
• In 2022, charitable donations accounted for just 5 percent of George Washington University’s $1.8 billion in total income. Program service income from tuition and fees, contracts, auxiliary enterprises, and medical education agreements comprised $1.56 billion, or 86 percent, of its overall revenues. GW did report roughly $6.2 million in unrelated business income from visitor parking and an unrelated partnership; still, the majority of its income is commercial in nature and should be counted as a tax expenditure. Furthermore, the same can be said of all US universities.
• With annual revenues of more than $1.2 billion, the 501(c)(3) Research Triangle Institute markets itself as “a leading independent scientific research institute with the contractual, legal, and business structures to serve any client with projects of all sizes.” Despite its nonprofit status, RTI behaves like a big business. “We actively evaluate acquisitions and other forms of strategic relationships that fit clearly with our strategy, mission, and values. We seek to acquire organizations in both the commercial and public sectors that are distinguished by their scientific stature and reputation for innovation.” RTI’s business income should be considered a tax expenditure.

Nonprofit Business Tax Expenditures Total $51 Billion 

Using the IRS Form 990 Extract for 2024, which includes data on more than 350,000 organizations that filed a full 990 tax return in 2023, I have attempted to compile a rough estimate of the total tax expenditure for the untaxed business income in each 501(c) category. As table 2 illustrates, these organizations generated $3.9 trillion in income in 2023, 68 percent of which was program revenue. Although not shown in table 2, investment and royalty income totaled $215 billion. By contrast, just 23 percent of total nonprofit income came from a combination of charitable contributions and public and private grants. Overall, tax-exempt organizations enjoyed net income of nearly $210 billion in 2023. By my estimate, these exemptions amount to nearly $51 billion annually in forgone tax revenue. 

Estimating the tax expenditure for all noncharitable organizations is fairly straightforward. Because these organizations cannot accept charitable contributions, I assume that all their income is business-related, and all their net income can thus be classified as “profits” taxable at the 21 percent corporate tax rate.  

For 501(c)(3) charitable organizations other than donor-advised funds and foundations, I assume that all income other than charitable contributions is effectively business-related, including program service income, royalties, investment income, rents, and UBIT income. For simplicity, I assume that net income is equal to taxable profits. (The more elegant method of calculating taxable profits, however, is to subtract charitable donations from total income and from total expenses to account for the portion of expenses covered by donations. What remains is business income and expenses. But the math works out the same in either case.)

I employ a different approach for donor-advised funds, public and private foundations, and university foundations. For these taxpayers, I tax only their investment income at the 21 percent corporate tax rate. 

Nonprofit hospitals and healthcare plans account for the largest share of 501(c)(3) income and business tax expenditures. In 2023, they combine for more than $1.5 trillion in total revenue and nearly $40 billion in net income. Taxed at the corporate rate of 21 percent, nonprofit hospitals and healthcare plans would have paid $8.3 billion in taxes that year. The nonprofit healthcare sector is actually much larger than this. There are thousands of smaller nonprofit clinics and specialty services classified under different National Taxonomy of Exempt Entities codes that I include among the general 501(c)(3) grouping discussed below. 

Colleges and universities generated a combined $247 billion in revenues in 2023, but they received a relatively modest $10.69 billion in net profits, which would have resulted in roughly $2.2 billion in taxes. For simplicity I’ve taxed all university net income at the same 21 percent rate, even though the One Big Beautiful Bill Act requires some universities to pay an excise tax on the net investment income of their endowments.

Similarly, the One Big Beautiful Bill Act raised the net investment excise tax on private foundations from 1.39 percent to a tiered rate schedule that tops out at 10 percent. For my estimates, however, I assumed that private foundations would pay the same 21 percent rate on their net investment income that corporations must pay on their investment income. Thus, since private foundations earned nearly $75 billion in investment income in 2023, I estimate they would pay $15.7 billion in taxes in the absence of the current excise tax.

Donor-advised funds and public foundations had $6.4 billion in investment income in 2023. This resulted in roughly $1.3 billion in income taxes. University foundations, which are often a separate organization from their endowments, had $2.7 billion in investment income, which resulted in $582 million in taxes. 

Finally, again for simplicity, I grouped the remaining 501(c)(3) organizations together into a single tax pool. Collectively, they generated more than $1.1 trillion in income that was roughly equally split between contributions and grants on the one hand, and the more business-like program service income on the other. These activities generated $64.6 billion in net profits. Taxed at 21 percent, the profits would generate more than $13.5 billion in tax revenues. 

Conclusion

JCT’s tax expenditure report correctly recognizes some nonprofit activity as divergent from standard tax code treatment. The largest of these diversions is the individual tax deduction for charitable contributions, which JCT estimates is worth $65 billion annually. And the largest business-related tax expenditure JCT documents is the $3 billion annual exemption for credit union income. But the tax-exempt sector is much larger than benevolent organizations and a few nonprofit financial institutions. 

Since 1909, lawmakers have chosen to exempt a wide array of business activities from the corporate income tax for reasons that have not always followed sound tax principles. As a result, the tax-exempt sector has grown to compose 12 percent of US GDP, and most of that income is derived from business-like or commercial sources. However lawmakers have justified these exemptions, they represent a diversion from a broad corporate tax base. 

Thus, JCT should expand its annual tax expenditure report to include the trillions of dollars in business income earned by nonprofits that is currently exempt from taxes. Lawmakers cannot make headway on reducing the deficit or simplifying the tax code without this information. 

A Note Regarding My Analysis of IRS Tax-Exempt Data

Compiling the dataset for this exercise was no easy task. It began by downloading IRS Statistics of Income Annual Extract of Tax-Exempt Organization Financial Data. These files are available for tax filing years 2010 through 2024 for three types of nonprofits: organizations that file a full 990 tax return, those that file a 990 EZ, and those that file as private foundations. For this report, I accessed the 2024 full 990 extract and the 2024 private foundation extract. 

These datasets lack certain demographic information such as the organization’s name, its state, and how it is coded in the National Taxonomy of Exempt Entities (NTEE). This information is contained in the IRS Exempt Organizations Business Master File Extract, which reports basic information for more than 1.8 million tax-exempt organizations. I then merged key information, such as organization names and NTEE codes, from the Business Master File into the 990 full extract and the 990 private foundation extract. 

I then sorted this dataset by 501(c) designations, from 501(c)(2) through 501(c)(29)—although some of these designations are obsolete or contained no records and were disregarded. Federal credit unions fall under 501(c)(1) as “instrumentalities” of the US and are not required to file a federal 990 tax return. For their financial information, I accessed data from the National Credit Union Administration (NCUA). 

Separately, I sorted the 501(c)(3) charitable organizations by their NTEE codes, which are both alphabetical and numeric. As an example, for my “Hospitals” grouping, I extracted organizations with NTEE codes E20 (Hospitals) and E30 (Ambulatory and Primary Care), and for the “Healthcare Plans” grouping I extracted those with codes E31 (Group Health Practices), E80 Health (General & Financing), and E110 (Single Organization Support). 

More than 39,000 organizations had no NTEE identifier. So, I manually moved some of the larger and more notable organizations (such as Carnegie Mellon University and Seton Hall University) from the “zero” NTEE group into a specific NTEE category that seemed appropriate. Another issue is that similar types of organizations are not always listed with the same NTEE codes, which makes grouping them challenging. For example, Fidelity Investments Charitable Gift Fund is under NTEE S500, whereas Vanguard Charitable Endowment Fund is listed under T700. 

Naturally, this exercise required some subjective judgment, so it is likely that other researchers—including those at JCT and Treasury—would arrive at different results than I have. This exercise is meant to be illustrative and to encourage the tax economists at JCT and Treasury to explore how they could incorporate more tax-exempt sectors into their tax expenditure reports.

About the Author

Scott Hodge is a tax and fiscal policy fellow at Arnold Ventures, where he contributes high-quality research aimed at reforming America’s tax code and promoting fiscal discipline. Before joining Arnold Ventures in January 2025, Hodge served as president and CEO of the Tax Foundation for 24 years, leading the organization in producing research and analysis that informed taxpayers and policymakers on principled tax policies that grow the economy and improve living standards.

Throughout his career, Hodge has been a sought-after voice on tax policy, routinely appearing on business channels such as Fox Business, CNBC, and Bloomberg, and testifying before Congress on numerous occasions. His essays have appeared in national publications such as the Wall Street Journal, Washington Post, USA Today, CNN, and Newsweek. He is also the author of the best-selling book Taxocracy: What You Don’t Know About Taxes and How They Rule Your Daily Life (Post Hill Press, 2024).

Notes