Who Benefits from Nonprofit Economic Development? Examining the Revenue Distribution of Tax-Exempt Development Organizations among U.S. Cities

ABSTRACT:

Questions surrounding the distribution of benefits have served as the focus for much research on local economic development. While nonprofit community development corporations (CDCs) emerged in the 1960s as one means of redistributing economic development benefits by targeting job training and business growth programs toward the urban poor, CDCs now represent only a portion of all nonprofit economic development organizations (NEDOs) in the United States. Newer forms of these organizations have emerged in recent years, carrying out diverse economic functions. This evolution of the nonprofit economic development subsector raises a critical question: Do nonprofit economic development activities remain concentrated today in poorer cities, or do wealthier cities also have high levels of nonprofit economic development activity? This study aggregates finance data for several types of NEDOs to the city level, for all U.S. cities with population 50,000 and over, in order to examine this question. Multivariate regression is used to estimate the effects of city-level demographic, institutional, and fiscal explanations on the level of NEDO revenues per capita. The findings demonstrate that revenues from some types of NEDOs, such as CDCs, remain concentrated in higher-poverty cities. However, wealthier cities have higher concentrations of revenue generated by nonprofit business assistance organizations and nonprofit real estate organizations. This paper concludes by discussing the implications of these findings for current federal and local policies related to tax-exempt organizations.

Notes

1 These organizations are alternately referred to in the literature as community development corporations (CDCs) and community-based development organizations (CDBOs).

2 Data were obtained on August 2, 2010 from the National Center for Charitable Statistics, using the data customization function (http://www.nccsdataweb.urban.org/tablewiz/tw_bmf.php). On the day data were obtained, NEDOs with National Taxonomy of Exempt Enterprises (NTEE) codes S20 (Community & Neighborhood Development), S31 (Urban & Community Economic Development), and S32 (Rural Economic Development) totaled 15,646 organizations and had combined assets of approximately $12 billion. By contrast, codes S30 (Economic Development), S40 (Business & Industry), S43 (Small Business Development), S46 (Boards of Trade), and S47 (Real Estate Associations) summed to 10,625 organizations but had combined assets of over $28 billion.

3 Data were obtained from the same source as above.

4 In FY 2005, 81.7% of all applications for 501(c)3 status were approved by the Internal Revenue Service. In the same fiscal year, an additional 17.2% of the applications were assigned the disposition of “other” (typically these applicants are asked for more information or to make corrections to their paperwork, many of which ultimately are approved) and the remaining 1.1% were denied. See IRS Databook: www.irs.gov/taxstats/charitablestats/index.html.

5 Cities such as San Jose have a number of such nonprofits that exist to serve entrepreneurs in the computer and technology industries.

6 The economic development subsector was not included in Clotfelter’s investigation.

7 This study aggregates revenues for all organizations within each city bearing each of the following codes, as classified by the NTEE: S20 (Community & Neighborhood Development), S31 (Urban & Community Economic Development), S40 (Business & Industry), S43 (Small Business Development), S46 (Boards of Trade), and S47 (Real Estate Associations).

8 Bauroth constructed evidence on the number of new NEDOs incorporated in six states using each state’s Secretary of State corporate registration records. However, state laws vary considerably with regard to tracking and regulation of nonprofit entities, and not all nonprofits are required to register with the state. Therefore, these data may not be fully representative of all new nonprofit ED organizations incorporated. The accuracy of his counts could be checked against the more comprehensive source of data compiled by the federal government (where all nonprofits are registered) using the National Center for Charitable Statistics site: www.nccsdataweb.urban.org/. Also, it is unclear from Bauroth’s description of data whether the analysis is limited to 501(c)(3) incorporations or whether nonprofit ED organizations that fall into other tax-exempt codes are also part of the sample.

9 Organizations that are exempt from filing a federal form 990 include those not formally incorporated, those having less than $25,000 in annual revenues, and religious organizations (although many do voluntarily).

10 The “S” category of NTEE codes is broadly labeled as “Community Improvement & Capacity Building.” There are several types of organizations that fall within this broad umbrella including men’s and women’s service clubs (Rotary, Optimists, Junior League, etc.), as well as neighborhood associations and block clubs, that typically do not generate much if any revenue and are thus not appropriate for this study.

11 A correlations test of all independent variables was performed to determine whether any variables had multicollinear effects. The correlations test revealed that the largest correlation was a negative one between poverty rate of the city and per capita income (−0.61). None of the remaining correlations, either positive or negative, exceeds 0.29. Skew diagnostics were also conducted for all independent as well as dependent variables to ensure normality of distribution.

12 Bauroth’s study measured the growth of NEDOs as the number of new organizations created. While the number of organizations is one way to measure activity within a subsector of the nonprofit economy, most nonprofit scholars agree that organizational revenues or assets provide a much better measure of sector activity, since many registered nonprofits are strictly voluntary organizations that have little or no revenues with which to provide services or carry out activities (Salamon, 1995).

13 NTEE codes are labeled by the National Center for Charitable Statistics as follows: S20 (Community & Neighborhood Development), S31 (Urban & Community Economic Development), S40 (Business & Industry), S43 (Small Business Development), S46 (Boards of Trade), and S47 (Real Estate Associations).