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Treasury Urges Caution On Tougher Taxes

May 9, 1988

WASHINGTON (AP) _ The Treasury Department urged Congress Monday to proceed cautiously on proposals that would toughen the tax on some activities of colleges, hospitals and other organizations which generally are exempt from taxation.

Such changes could force universities, for example, to pay tax on income earned from their cafeterias, or tax hospitals on profits from their pharmacies.

″It would be premature to make far-reaching changes to the law at this time,″ Don Chapoton, assistant secretary of the treasury for tax policy, told the House Ways and Means oversight subcommittee.

If numerous proposals being weighed are ever formalized into a bill, he added, ″it will be important to assess the over-all impact of such legislation on tax-exempt organizations in order to determine whether the benefits of the legislation justify the imposition of such burdens.″

Several members of Congress favor strengthening the special tax on non- profit organizations’ income that is not related to the purpose for which their tax exemption was granted. The levy is known as the ″unrelated- business-income tax.″

The tax was enacted in 1950 to protect taxable enterprises that find themselves competing with exempt organizations. The tax produced $119 million last year - almost double the 1986 figure - from 30,500 organizations. There is some evidence, officials said, that this increase was attributable to subcommittee hearings last year, which were widely followed by non-profit groups.

The increased collections, said Rep. J.J. Pickle, D-Texas, the committee chairman, were ″a result of either better compliance by tax-exempt organizations or a dramatic growth in income-producing activities subject to the tax or both.″

The Treasury Department estimates that if all the toughest proposals being considered were enacted, the maximum yield would be no more than $5 billion a year.

Chapoton noted, however, that the tax does more than produce revenue and protect taxable competitors. The tax ″also serves the important goals of enhancing the efficiency of the governmental subsidy inherent in tax exemption and of helping to ensure the accountability of tax-exempt organizations.″

Although Chapoton endorsed some of the several suggestions the subcommittee drafted last year for tightening the tax, he rejected two major changes.

Present law exempts from tax a non-profit organization’s income generated by a business that is ″substantially related″ to the organization’s exempt purpose. The proposal would exempt income only if ″directly related.″ That would generate considerable uncertainty without improving the standard, Chapoton said.

He also said the administration opposes a suggestion that Congress declare what specific income-producing activities standing alone by themselves should be tax-exempt. Under that test, Chapoton said, operations of dormitories, dining halls and hospital pharmacies likely would be taxable.

A long line of witnesses gave the subcommittee advice on all sides of the issue.

-American Arts Alliance: ″Due to recent changes in federal tax and spending policies, rising costs at non-profit arts institutions and stagnant federal funding, this is no time to make any further changes in policies that have stimulated the growth of the arts in America.″

-National Association of College Stores: ″Some institutional bookstores pay more in taxes than many small businesses. This suggests that ... (the present tax) is working.″

-Small Business Administration: Present law has ″allowed non-profits to earn non-taxable income from activities never contemplated by Congress in carving out their original exemption. The distinction between the two sectors has become blurred - in some instances, beyond recognition.″

-Independent Sector, representing numerous charities and other non-profit organizations: Several proposals being considered by the subcommittee ″would result in changes going far beyond corrected perceived abuses and anomalies to radically altering the way the tax system affects the viability of charities in this country.″

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