The Pitfalls of Profits

Abstract:     
Since the 19th century, the Young Men's Christian Association (YMCA) has morphed into a health-and-fîtness Goliath. In 2001, this tax-exempt organization had revenues of $4.1 billion, making it the largest nonprofit, in terms of earned income, in the United States. Today, many of the more than 2,400 local Y's in the country boast basketball courts, swimming pools, jogging tracks, and well equipped weight rooms. These familiar neighborhood institutions are under heavy fire, however, for an increasing presence in upscale areas. Private health clubs have sued Y's for unfair competition, claiming that as a tax-exempt charity, the YMCA is able to undercut private operators' prices enough to siphon away a significant amount of profitable business. The Y's expansion into affluent neighborhoods raises the question of whether it has become overly commercialized and whether it deserves its tax-exempt status. The Y's expansion into new markets is just one example of how nonprofits are becoming increasingly commercialized. The social sector is witnessing a wave of commercialization among nonprofits. The trend is partially a response to a leveling off of government grants and contracts as well as the lack of growth in tax-deductible donations to charity- the traditional sources of funding for nonprofits. Mechanisms to encourage donations, by altering tax law, are readily available. Mechanisms to discourage commercial activity, however, are more challenging. Outright prohibition of any activity that generates "sales" would have vast and uncertain consequences, but the use of tax instruments to discourage all commercial activity - not merely unrelated business activity, which is already subject to taxation deserves exploration.

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