Federal oversight: When regulatory burdens rise, charities suffer

Former Federal Reserve Chairman Alan Greenspan once noted, “whatever you tax, you get less of.” The same is true of excessive regulation. Unfortunately, that’s something it appears the Biden administration doesn’t understand.

Last month, the White House released plans to double the threshold for what counts as an “economically significant” regulation, from $100 million to $200 million in annual effects. The move massively expands the volume of regulations that can be approved without any additional oversight.

Excessive regulatory accumulation has serious costs, and while this development is obviously bad news for an economy already weighed down by a cost-of-living crisis, what’s less obvious — but no less important — is how regulatory burdens affect charities in the U.S.

Earlier this year, economist Wayne Winegarden published a study with the Philanthropy Roundtable that suggested excessive levels of regulation are counterproductive to fostering a positive environment for charities to flourish.

Specifically, the study observes how regulatory accumulation impacts charitable activity across the 50 U.S. states. To account for the different ways in which states regulate charitable organizations, the study considers start-up fees, annual reporting requirements, solicitor fees, audit requirements and various oversight regulations that exist in all 50 states. 

Charities are often subject to a complex web of regulations at the federal, state and local levels. Compliance with these regulations can be time-consuming and expensive, diverting resources away from the charity’s mission and the communities they serve. 

For smaller charities with limited resources, regulatory compliance can be especially challenging. The administrative burden of complying with regulations can be overwhelming, and the costs of hiring additional staff or legal counsel to ensure compliance can be prohibitive. 

Excessive regulation can also stifle innovation and creativity in the charity sector. Charities that are constantly bogged down by regulatory requirements may be less likely to experiment with new approaches or take risks that could lead to greater impact. 

While all states regulate their charity sector, there are striking differences between their rules. For example, states such as Colorado and Texas require no annual filing fees, while charities in New York state are subject to a $1,525 annual fee. Massachusetts charities are subject to additional filing fees of up to $2,000. 

Then there are solicitor registration and renewal fees that can be as high as $1,000 in states such as Massachusetts and surety bond requirements that can be as high as $50,000 in states such as Florida. 

In comparing the impact of such stringent and costly regulations on charitable activity, the study compares these requirements with the number of charities per billion dollars of state GDP for each state. The results suggest a negative relationship between excessive regulations and charitable activity. 

Among the top five states with the least burdensome regulatory environment, the average number of charities is 76 per billion dollars of GDP. Consistent with their poor regulatory rankings, the five states with the most burdensome regulatory environment averaged only 59 charities per billion dollars of GDP.

In other words, states with regulatory environments that are more conducive to a thriving charitable sector have on average about 30 percent more charitable activity than states with the most burdensome regulations.

The author of the study concludes by noting that his results “indicate that the states in the bottom two-thirds of the rankings may be able to increase the amount of charitable activity in their states by replicating the regulatory environment of the states in the top-third of the rankings.”

While this new study doesn’t draw on causation between regulatory burdens and charitable activity, the analysis is certainly suggestive of the economic consensus that excessive regulatory accumulation reduces activity within the regulated sector.

What’s more, the findings of the study are especially relevant to regulatory developments at the state level. In recent years, we have seen a growing number of legislative proposals that seek to worsen the regulatory burden on the charitable sector. Many of these requirements extend beyond the consumer protection goals of regulations and infringe on organizations’ abilities to fulfill their charitable missions.

Biden may have doubled the threshold for regulations that need federal oversight, but states don’t have to follow suit. Rather than worsen regulatory burdens on charities, state lawmakers should demonstrate their support for the charitable sector by fostering the softer regulatory approach of states with thriving charitable activity. Policymakers could start by requiring legislative approval of new regulatory requirements that raise costs for charities and foundations in the state.

By reducing the regulatory burdens placed on charitable organizations, charities and foundations can continue to focus their efforts on advancing their missions and supporting communities in need.

Jack Salmon is a Young Voices contributor and writer on economics. His commentary has been featured in a variety of outlets, including the Hill, Business Insider, RealClearPolicy, and National Review Online.