Growth of the Nonprofit Sector: More Charities, Better Solutions

Executive Summary

• The nonprofit sector is a cornerstone of American society, the embodiment of the right to freely associate, and to meet shared goals outside of the government sphere. Despite their profound impact and extensive contributions, nonprofits are again facing government scrutiny following a growth period.
• It is important to consider legitimate concerns among lawmakers regarding organizations that violate existing laws, particularly those tied to hostile foreign governments or terrorist groups. As solutions to these concerns are considered, lawmakers should avoid applying a broad-brush approach to the charitable sector that could inadvertently harm the vast majority of organizations doing remarkable work in their communities.
• Since 2000, the number of nonprofit organizations in the U.S. has grown by 36 percent. Nearly 60 percent of the growth in 501(c)(3) organizations from 2002 to 2022 is due to an increase in human services and public and social benefit organizations.
• Employment in the 501(c)(3) sector grew by more than 30 percent between 2002 and 2022. Over half of nonprofit employment growth can be attributed to nonprofit health care employment, which grew from 5.3 million to nearly 6.9 million during this period.
• Despite common misconceptions, only around 2-4 percent of 501(c)(4) organizations engage in political activity and/or policy advocacy. The most common types of 501(c)(4) organizations are community service, sports associations, volunteer fire departments, homeowners’ associations, or veterans’ organizations.

Introduction

The nonprofit sector has experienced notable growth in recent decades. These organizations play a vital role supporting communities in need, embodying the constitutional right to freely associate, and representing charitable and community efforts of Americans to address and solve pressing issues. However, this growth has also sparked criticism and concerns regarding proper oversight and political activity.

This paper aims to shed light on growth trends and dynamics within the nonprofit sector. The paper will examine the overall growth patterns in the nonprofit sector, highlighting the distinct trajectories of different types of nonprofit organizations. The paper will then provide an in-depth analysis of the growth, exploring data on organizational growth, employment trends, and the potentially misleading nature of often-cited asset data. It will illuminate the factors driving this growth and its implications.

Philanthropy Roundtable fully acknowledges the legitimate concerns of policymakers regarding organizations that violate existing laws and regulations, particularly those tied to foreign (especially adversarial) government funding or terrorist groups. At the same time, it is important that we avoid applying a broad-brush approach to the charitable sector that could inadvertently harm the vast majority of organizations doing remarkable work in their communities. Through this comprehensive analysis, the paper aims to provide a balanced and well-informed perspective on the nonprofit sector, fostering a deeper understanding of its complexities and the need for nuanced policymaking.

The Role of Nonprofits: Civil Society and Serving Communities

The United States is more than just a government and its citizens. It is home to an intricate landscape of individuals passionate about diverse causes and communities. The constitutional guarantee of freedom of association allows Americans to organize and gather based on their interests and passions. That right is the backbone of the American nonprofit sector. Woven into the very fabric of American society, 1.8 million nonprofit organizations form an intricate tapestry that stretches across every corner of the nation.

Transcending boundaries of age, gender, race, or socioeconomic status, these entities are the lifeblood of communities, providing food for the hungry, medical care for the ailing, shelter for the homeless, and educational opportunities for all. From the pulsing heart of urban centers to the most remote rural enclaves, these nonprofits are catalysts for positive change. They foster civic engagement, nurture leadership, drive economic growth, and fortify the social bonds that bind our neighborhoods together. The citizens organizing together into these entities offer a helping hand, pathways to opportunity and a beacon of hope.

More than this, the right to associate freely is a constitutional right enshrined in our nation’s founding documents and robustly defended through multiple U.S. Supreme Court precedents. The tax-exempt status of the nonprofit sector has been upheld by the government since before much of the modern tax code even existed. This ensures a robust nonprofit sector can operate effectively with a degree of independence from government control.

This thriving civil society has always been a key feature of the Tocquevillian spirit that sets America apart from the rest of the world. Almost two centuries ago, Alexis de Tocqueville wrote extensively about the American phenomenon of forming associations, whether professional, social, or civil.¹De Tocqueville, Alexis. De la Démocratie en Amérique. 1835. Tocqueville said these associations expanded democracy beyond the confines of elected offices, reaching ordinary people who unite around shared interests to enact change for broader segments of society.

Through the formation and participation in associations, Americans effectively express their priorities concerning issues vital to themselves, their families, and their communities. Organizations of civil society have a long-standing tradition of propelling social movements in American history, from the abolition of slavery to women’s suffrage to the more recent community responses to the COVID-19 pandemic. These are fundamental examples of how philanthropy helps nonprofits address problems in society.

In this sense, nonprofits also fill in the gaps that government cannot or should not. Alleviating the fiscal pressures on government, voluntary associations provide nimble and innovative support and social services to communities across the country. Unlike the government, nonprofit organizations have the flexibility to respond quickly to emerging issues, pilot innovative solutions, and cater to specific local or niche needs.

Curtailing civil society would not only hamper a fundamental constitutional right, it would result in the government facing immense pressure to allocate more resources toward social services previously supported by private voluntary giving. This would lead to higher taxes, budget deficits, and cuts in other essential areas like infrastructure, education, or defense.

Aside from the fiscal costs, limiting nonprofits also risks diminishing civil engagement, leading to a more passive and disengaged citizenry reliant solely on government programs—not the robust Tocquevillian civil society with limited government we should aspire to uphold.

Growing Criticism of Nonprofit Sector

In spite of the immense value the nonprofit sector brings in serving communities, history abounds with examples of government scrutiny and criticism that typically arise when the nonprofit sector is growing most robustly. For example, in the early 20th century, several charitable organizations obtained federal charters through incorporation by Congress. Notable examples include the Rockefeller-funded General Education Board in 1903 and the Carnegie Foundation for the Advancement of Teaching in 1906.²Lankford, James E. “Congress and the Foundations in the Twentieth Century.” Wisconsin State University, 1964.

This growth in incorporated nonprofit organizations was met with growing skepticism by policymakers. When John Rockefeller Sr., a renowned philanthropist who had donated $158 million of his personal funds to various causes by 1909, applied for a federal charter to establish the Rockefeller Foundation in 1910, Congress rejected his application.³“John Rockefeller Sr.” Philanthropy Roundtable (blog). n.d. https://www.philanthropyroundtable.org/hall-of-fame/john-rockefeller-sr/. Congressional proceedings and media coverage were both dominated by populist apprehensions about foundation assets growing “beyond the control of ordinary government restrictions.”⁴The New York Times. “Rockefeller Charter: Conceives that it might safeguard control of standard oil.” 1910.

Similarly, during the economic boom period following World War II nonprofit organizations experienced significant growth. For example, between 1915 and 1955, the number of foundations, especially small family foundations, had grown from 27 organizations to over 4,100.⁵Lankford, James E. “Congress and the Foundations in the Twentieth Century.” Wisconsin State University, 1964. This growth, coupled with populist anxieties, fueled almost two decades of congressional scrutiny that culminated in the 1969 Tax Reform Act, imposing significant restrictions and regulations on the operations of private foundations.

As the number of nonprofit organizations increases, we are again hearing increased skepticism of the growth of charitable organizations in recent years. In December 2023, the House Ways and Means Oversight subcommittee held a hearing focusing on how the growth of the tax- exempt sector could impact the American political landscape.⁶Philanthropy Roundtable (Statement for the Record). “The Growth of the Tax-Exempt Sector and the Impact On the American Political Landscape,” December 19, 2023.

The hearing largely focused on foreign interference in U.S. elections and nonprofit involvement in political activities. However, a common underlying theme was broad skepticism of the growth in nonprofit organizations observed in recent years and a misguided perception that much of this growth is being driven by groups with political agendas.

While concerns related to abuse of status or election interference are important and may warrant further examination, it is also important to differentiate between these activities and what the data tell us about the growth of the nonprofit sector in recent years and decades.

Growth in Number of Nonprofit Organizations

We observed notable growth in the total number of organizations since the turn of the century based on the number of registered nonprofit organizations under the Internal Revenue Code 501(c). In 2000, there were around 1.35 million 501(c) organizations registered in the U.S. As of the latest data available, there were almost 1.85 million organizations in operation in 2023.

This 36 percent increase in the number of registered 501(c) organizations amounts to almost 500,000 new nonprofits registered over the twenty-three-year period observed. This paper is focused specifically on the growth and number of nonprofit organizations over time. Other studies might seek to explore the proportion of nonprofit revenues and expenditures held by a fraction of nonprofit organizations. This is a potential area for future research.

Figure 1 below shows the breakdown of 501(c) organizations by type, while Figure 2 shows the growth in total 501(c) organizations between 2000 and 2023. The data reveal robust growth in nonprofit organizations between 2000 and 2010, then a notable decline between 2010 and 2013 demonstrating the strain placed on nonprofits following the Great Financial Crisis. The particularly sharp drop between 2010 and 2011 is largely explained by the IRS revoking the status of almost 280,000 organizations that failed to file an information return for three consecutive years.⁷Blackwood, Amy S., and Katie L. Roeger. “Revoked: A Snapshot of Organizations That Lost Their Tax-Exempt Status.” Urban Institute, Center on Nonprofits and Philanthropy, August 2011.

Figure 1. Breakdown of 501(c) Organizations

Figure 2. Total 501(c) Organizations: 2000-2023

Then we have seen a steady recovery in the growth of nonprofits since 2013, with the total number of nonprofits finally surpassing its 2010 peak in 2021. The gray shaded areas of Figure 2 represent years with economic recessions including the 2001 recession, the Great Recession, and the COVID-19 pandemic recession of 2020.

To better understand the nuances of this growth trend, it is useful to break down this data by 501(c) subset organizations. The most common types of organization under IRC 501(c) are 501(c)(3), 501(c)(4), and 501(c)(6) organizations. The 501(c)(3) organizations are considered public charities and can receive tax-deductible contributions. They must be organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes.

On the other hand, 501(c)(4) organizations are social welfare organizations whose net earnings are devoted exclusively to charitable, educational, or recreational purposes. Donations to 501(c)(4)s are generally not tax-deductible. These organizations may engage in unlimited lobbying and some political campaign activities.

Finally, 501(c)(6) organizations are membership-based groups like business leagues, chambers of commerce, boards of trade, and professional associations. They promote the common business interests of their members. Like 501(c)(4) organizations, they are exempt from federal income tax but contributions to them are not tax-deductible.

The largest category of 501(c) organizations are 501(c)(3) nonprofits, making up almost 82 percent of all nonprofits in 2023. The growth in 501(c) (3) organizations since 2000 largely reflects the overall growth in total 501(c) organizations, with significant growth between 2000 and 2010, a sharp decline between 2010 and 2013, and steady growth thereafter. Figure 3 below indicates a growth trend of 501(c)(3) organizations since 2000 from around 819,000 to slightly over 1.5 million registered organizations in 2023. This 85 percent increase in the number of registered 501(c)(3) organizations amounts to almost 700,000 new nonprofits registered over the twenty-three-year period observed.

Figure 3. Growth in 501(c)(3) Organizations: 2000-2023

The second largest category of 501(c) organizations are 501(c)(4) nonprofits, making up just 4 percent of all nonprofits in 2023. The growth in 501(c)(4) organizations deviates significantly from that of 501(c)(3) growth trends. Between 2000 and 2010, the number of 501(c)(4) nonprofits remained roughly consistent, around 140,000 organizations. Since 2010 there has been a precipitous decline in the number of registered and operating 501(c)(4) organizations from almost 140,000 in 2010 to around 73,000 in 2023.

Overall, this twenty-three-year period has seen the number of 501(c)(4) organizations decline by 46 percent as almost 66,000 501(c)(4) nonprofits have closed their doors since 2010 alone. Figure 4 below shows the trend in 501(c)(4) organization growth between 2000 and 2023. It is worth noting the spikes observed in years such as 2014 are anomalies which overstate the number of organizations in those years due to processing changes that occurred in that period.

Figure 4. Growth in 501(c)(4) Organizations: 2000-2023

The third largest category of 501(c) organizations is 501(c)(6) nonprofits, making up a little over 3 percent of all nonprofits in 2023. Similar to 501(c)(4) organizations, 501(c)(6) nonprofits have experienced a notable decline in the number of operating organizations since the turn of the century. Between 2000 and 2010, the number of 501(c)(6) organizations increased at a steady rate from about 82,000 to about 92,000 organizations-an increase of roughly 10,000 over the decade.

However, since 2010 there has been a sharp downturn in the number of registered 501(c)(6) nonprofits, dropping to a new low of less than 60,000 organizations in 2023. Figure 5 below demonstrates the trend in growth of 501(c)(6) organizations over the twenty-three-year period, with a 27 percent decline observed since 2000.

Figure 5. Growth in 501(c)(6) Organizations: 2000-2023

To sum up, the growth of 501(c) nonprofit organizations in the U.S. has been modest and nuanced since the turn of the century. The total number of these organizations increased from approximately 1.35 million in 2000 to nearly 1.85 million by 2023, reflecting a 36 percent rise. This expansion was characterized by robust growth from 2000 to 2010, a decline between 2010 and 2013 due to the Great Financial Crisis and large scale revocations in 2010/11, and a steady recovery after 2013.

The 501(c)(3) nonprofits, which are public charities, make up the largest category, accounting for 82 percent of all 501(c) organizations in 2023. Their numbers grew from around 819,000 in 2000 to over 1.5 million in 2023, marking an 85 percent increase. While the total number of 501(c) organizations has increased, the trends within specific categories have varied significantly, with 501(c)(3) organizations showing strong growth, and 501(c)(4) and 501(c)(6) organizations experiencing evident declines since 2010.

Growth of 501(c)(3) Organizations by Primary Activity

Given that the growth in nonprofit organizations over the past two decades has been fueled entirely by growth in the number of 501(c)(3)s in operation over time, it is valuable to dig deeper into the data on the types of 501(c)(3) organizations that have experienced the most growth during this time. The Internal Revenue Service (IRS) categorizes 501(c)(3) nonprofits into different national taxonomy codes (NTEEs) based on the primary activity of each organization. Using the latest available data from the IRS Exempt Organization Master File, we break down the data into subcategories of nonprofit organizations filtering the data for the year 2022.⁸Internal Revenue Service, Exempt Organizations Business Master File. Data last accessed June 10, 2024. 9 Jesse Lecy, (2023). NCCS Legacy Core Series.

Additionally, to observe the breakdown in 501(c)(3) organizations from past years, we use data from the National Center for Charitable Statistics (NCCS) core series database.⁹Jesse Lecy, (2023). NCCS Legacy Core Series. This paints a picture of the growth in 501(c)(3) organizations over the past two decades (2002-2022) by observing which types of 501(c)(3) organizations have seen the most growth.

It is important to note the IRS Master File and NCCS databases do not include all 501(c)(3) organizations in their total count. Nonprofit organizations with revenues below $50,000 typically file form 990N ePostcard which isn’t captured by these datasets. Additionally, some religious congregations are not required to register with the IRS, so data on these organizations also is not captured by these datasets. While observing the growth trend of organizations with revenues above $50,000 does not give a complete picture of the 501(c)(3) landscape, it does give the broadest overview available data offers.

We classified 501(c)(3) organizations into ten categories by comparing IRS data from 2002, 2013, and 2022: Arts, Culture, and Humanities; Education; Environment and Animals; Health; Human Services; International and Foreign Affairs; Civil Rights, Social Action, and Advocacy; Public and Societal Benefit; Religious Organization; and Other or Unknown.

Breaking organizations down into these ten categories enabled pinpointing what types of 501(c)(3) organizations account for the observed growth in the number of registered 501(c)(3)s in recent decades. To further illustrate what types of nonprofit organizations fit into each of these ten categories, the following table provides examples for each.

Table 1. Examples of Organizations by Nonprofit Subsector

Primary Activity	Examples of Organizations
Arts & Culture	Art museum, theater, history museum, ballet, performing arts school
Education	K-12 schools, college, community college, technical college, library
Environment & Animals	Land conservation, botanical garden, animal welfare, zoo
Health	Hospital, ambulatory service, nursing service, mental health center
Human Services	Food bank, soup kitchen, homeless shelter, fire prevention, foster care
International & Foreign Affairs	Cultural exchange programs, international aid, foreign policy research
Civil Rights & Advocacy	Public policy, research institute, human rights advocacy, civil liberties
Public & Soc Benefit	Veterans’ groups, United Way, American Red Cross, foundations
Religious Organizations	Church/temple, religious media, interfaith coalition
Other or Unknown	Other/Unknown

Change in Composition of 501(c)(3) Organizations Since 2002

Looking first at the change in the composition of 501(c)(3) organizations since 2002, throughout the period observed, human services organizations have made up the largest share of nonprofits, at 34 percent in 2002 and 32.5 percent in 2022. Educational organizations along with public and social benefit organizations comprise 13.6 and 18.9 percent respectively of all 501(c)(3) organizations in 2022.

Examining the changes in the share of nonprofits by category type, the data reveal some interesting trends, highlighted in Figure 6 and 7 below. First, public and social benefit organizations have seen the largest increase in the total share of organizations from 11.4 percent in 2002 to 18.9 percent in 2022-a 7.5 percentage point increase.

The second largest percentage point increase is observed for the environment and animals category of nonprofits, growing by 2.3 percentage points, from just 3.8 percent of all 501(c)(3) organizations in 2002 to 6.1 percent in 2022. At the other end of the growth calculation, both health and education categories have experienced the largest declines in their respective shares of total organizations. The health category declined by a notable 5.2 percentage points and education by 3.7 percentage points.

Among the remaining categories, religious organizations saw modest growth as a share of all organizations. Similarly, civil rights groups and international affairs groups experienced little to no growth in their share of all 501(c)(3)s over the two-decade period.

Figure 6. Composition of Nonprofits by Primary Activity – 2002

Figure 7. Composition of Nonprofits by Primary Activity – 2022

Change in Number of 501(c)(3) Organizations Since 2002

Reviewing the change in the composition of different nonprofits over time gives a sense of underlying growth trends. A review of the growth in numbers of 501(c)(3) organizations between 2002, 2013, and 2022 is additionally helpful. It is important to note these are snapshot observations of individual years (2003, 2013, and 2022) and not a year-to-year analysis.

Figure 8 below starts from the primary activities listed on the left side and works across to the right to evaluate the rate of growth for different types of nonprofits. Arts and culture organizations have seen modest and consistent growth, almost doubling in volume from about 30,000 to nearly 60,000 organizations.

Figure 8. Number of 501(c)(3) Nonprofits in 2002, 2013, and 2022 by Primary Activity

Next, educational organizations experienced little growth between 2002 and 2013, and very little growth since. There are about 70 percent more educational organizations in 2022 versus 2002. In relative terms, environment and animal-related organizations have seen a 3.5-fold increase between 2002 and 2022, a nominal increase of some 26,445 organizations.

In contrast, health-related organizations have seen only a 36 percent increase in the volume of organizations relative to 2002. There were roughly 38,000 such organizations in 2002 and just under 52,000 in 2022. The bulk of that growth occurred between 2002 and 2013. With the largest nominal increase, human services organizations have roughly doubled, growing by almost 105,000 from about 94,000 in 2002 to almost 199,000 in 2022.

International and foreign affairs organizations have also seen growth over this period. Though there has been a nearly three-fold increase in such groups, this constitutes less than 10,000 new nonprofits over a twenty-year period. Similarly, civil rights and advocacy organizations have doubled in volume since 2002, yet this growth represents less than 2,700 new organizations over twenty years.

With a 3.6-fold increase between 2002 and 2013, public and social benefit organizations surged from less than 32,000 to about 114,000 organizations and have remained relatively stagnant. Combined, growth in human services and public and social benefit organizations over the twenty years explains about 56 percent of the total growth in 501(c)(3) organizations during that time. Finally, the number of religious organizations has multiplied almost three times between 2002 and 2022, from about 16,000 to about 46,000 organizations–an increase of some 30,000 new organizations.

501(c)(3) Nonprofit Growth Trends Respond to Social Needs

While the data do not encompass all 501(c)(3) organizations operating in the United States, it does give the broadest overview available data offer. Our analysis reveals almost six- tenths of the growth in 501(c)(3) organizations between 2002 and 2022 is rooted in the growth in human services and public and social benefit organizations. Determining the causes of this growth is outside the scope of this paper.

While further research would be needed to identify the factors at play, presumably an increased need for social and human services explains at least some of this growth in recent years. Empirical data estimates the number of operating food pantries in the United States at around 50,000.¹⁰Burke, Michael P., and Emma Huffman. “Estimating the Number, Distribution, and Predictors of Food Pantries in the US.” Journal of Nutrition Education and Behavior 55, no. 3 (2023), 182-190.

This is not surprising considering food insecurity trends. In 2001, less than 3 percent of households (8.8 million Americans) utilized food pantries. By 2021, this share increased to almost 6 percent of households (19.3 million Americans) using food pantries.¹¹USDA, Economic Research Service. “U.S. households with children headed by single females used food pantries more than others over last two decades.” US Department of Agriculture. https://www.ers.usda.gov/data-products/chart-gallery/gallery/chart- detail/?chartId=107010

In a similar vein, the upward trend in homelessness over the past seven years may have fueled the growing number of organizations providing homeless relief (i.e.: homeless shelters). Roughly six-in-ten homeless Americans (400,000 people) live in homeless shelters, with around a quarter million still living without shelter.¹²US Department of Housing and Urban Development. “The 2023 Annual Homelessness Assessment Report (AHAR) to Congress.” December, 2023. The growth in the volume of 501(c)(3) organizations in recent years and decades may be in response to growing needs for social assistance, such as poverty alleviation.

Comparative Efficiency of Nonprofits to Provide Social Services

Unlike the government, which must rely on centralized decision-making and bureaucratic processes, charities are able to operate with greater flexibility and adaptability. They are also better able to experiment with new approaches and respond quickly to changes in the environment.¹³There are several genuine reasons why nonprofit organizations are better suited at solving social issues than government. This paper does not attempt to conduct a deep dive into this topic, but it is important to acknowledge.

We saw this in 2020 with the onset of the COVID-19 pandemic. The pandemic propelled U.S. charitable giving in 2020 to the highest level on record at that time. The increase in charitable donations was most concentrated in parts of the country hardest hit by the pandemic. A study found charitable giving increased in 78 percent of counties that experienced the greatest threat from COVID-19, particularly to human services charities that helped mitigate the effects of the pandemic.¹⁴Fridman, Ariel, Rachel Gershon, and Ayelet Gneezy. “Increased generosity under COVID-19 threat.” Scientific Reports 12, no. 1 (2022).

Charities have a greater incentive to use resources efficiently and maximize the impact of their programs. As charitable organizations rely on the voluntary contributions of donors and supporters, charities must demonstrate a high level of accountability and transparency to maintain public trust and support. This means they are more likely than the government to allocate resources to programs that are effective and avoid wasteful spending.

Nonprofit organizations, unlike the government, are more attentive to addressing the underlying causes of social struggles. This is because nonprofit organizations are often more innovative and more nimble at alleviating homelessness by tackling the underlying causes, which are often rooted in other issues like substance abuse, prior incarceration, lack of formal education, or gang activity. For example, the Delancey Street Foundation (DSF) provides residential rehabilitation services and vocational training programs for substance abusers and convicted criminals. DSF has been labeled the “Harvard for the underclass” and as of 2020 over 23,000 graduates have successfully completed the program.¹⁵Bass, David. Clearing Obstacles to Work: A Wise Giver’s Guide to Fostering Self-Reliance. The Philanthropy Roundtable, 2015, pp. 78-80.

Another example is the Doe Fund in New York City. This nonprofit provides shelter for the homeless, but unlike many shelters, the goal is not merely to sustain life. The mission of the Doe Fund is to give homeless individuals their lives back, so they can live independently and self-sufficiently. Those admitted to Doe Fund shelters are considered “trainees” rather than “homeless,” and the average trainee spends nine months at the shelter.¹⁶Ibid. pp. 80-82.

Residents are enmeshed in the Doe Funds paid work program which provides transitional jobs in areas like building maintenance, commercial driving, pest control, and back-office work. Around two-thirds of those who enter the program graduate into independent life and employment. Since 1990, the Doe Fund has helped over 28,000 homeless and formerly incarcerated individuals rebuild their lives.

In contrast, government programs are often subject to political considerations and bureaucratic inefficiencies, which can lead to waste and mismanagement. For example, in California, the government— failing to address the underlying causes of homelessness-has built thousands of homes to house the unsheltered. One study found that every 10 housing units built by the government reduced homelessness by just one person.¹⁷Corinth, Kevin. “The impact of permanent supportive housing on homeless populations.” Journal of Housing Economics 35 (2017), 69-84. Many of these government housing projects cost California taxpayers over $700,000 or $800,000 per unit.¹⁸Galperin (City of Los Angeles), Ron. The Problems and Progress of Prop. HHH. Los Angeles: City of Los Angeles Controller, 2022. In other words, the cost of permanently housing one individual costs (assuming ten units reduce homelessness by one person) California taxpayers over $7-8 million.

Nonprofit Employment Trends 2002-2022

Observing employment growth offers an alternative method of measuring the growth in the 501(c)(3) sector in recent decades. Given the 85 percent growth in the number of 501(c)(3) organizations between 2000 and 2023, robust rates of employment growth in the nonprofit sector are expected. These trends were measured using employment data from the George Mason University Nonprofit Employment Data (GMU-NED) Project (2017, 2022). Data and reports were also used from Johns Hopkins University Nonprofit Economic Data (NED) bulletins (2004, 2007, 2010) and Bureau of Labor Statistics (BLS) reports (2002, 2014).

Employment growth warrants exploration as this has been another area of controversy among critics of growth in the nonprofit sector. For example, during a House Ways and Means Oversight Subcommittee hearing in December 2023, one committee member noted: “In the last fifteen years, employment by nonprofits has increased by over 30 percent. By comparison, jobs in the private sector overall only increased by 9 percent in the same period.”¹⁹House Committee on Ways and Means. “Oversight Subcommittee Hearing on Growth of the Tax-Exempt Sector and the Impact on the American Political Landscape.” December 13, 2023. The committee member suggests this growth may be the result of increased funding from foreign nationals, particularly those seeking to influence American politics.

To ascertain the validity of these claims, it is helpful to conduct a deep dive into the employment composition and trends of 501(c)(3) organizations in recent years. Figure 9, below, highlights the growth in nonprofit employment in comparison to private sector employment during the two decades between 2002 and 2022. Employment in nonprofit organizations experienced strong growth during two periods, 2002-2007, and 2010-2017, growing from less than 9 million employees in 2002 to around 12.5 million in 2022. Between 2017 and 2022, this growth largely stunted, growing at less than 1 percent during this five-year period.

Figure 9. Growth in Nonprofit vs Private Jobs: 2002-2022

The nominal growth in the number of nonprofit employees pales in comparison to private sector growth—3.8 million new jobs over twenty years versus more than twenty- three million new jobs in the private sector. Nevertheless, the claim that the growth rate for nonprofit sector employment has outpaced the growth rate for the private sector over the past fifteen years holds true over specific time frames. In other words, the growth is a result of where we set the starting point for measuring trends. Private sector employment suffered significant losses during the 2008-2009 financial crisis, while the nonprofit sector proved largely resilient during that business cycle downturn.

Therefore, looking at the period 2007-2022, nonprofit employment has grown by 20 percent versus 14 percent for private sector employment. However, starting instead in 2010, nonprofit employment has grown 18 percent versus 21 percent for the private sector. For those lawmakers concerned with the employment trends, it may be instructive to see there are far fewer nonprofit jobs than for-profit jobs – and the growth rate is largely dependent on the periods of time chosen for analysis.

Growth in Nonprofit Employment by Category

Next is a break down of nonprofit employment over time by six different types of nonprofit work employees are engaged in. These categories include: Health Care; Education Services; Arts & Entertainment; Religious, Grantmaking, Civic; Social Assistance; and Other. Not all data and reports break down nonprofit employment by category of employer, so this was limited to three years with abundant data points: 2004, 2014, and 2022.

As Figure 10 shows, health care employees make up a little over half of all nonprofit employees, growing from about 5.3 million workers in 2004 to 6.4 million in 2014, and almost 6.9 million in 2022. Education services are the second largest category of nonprofit employment throughout this 18-year period, growing from about 1.4 million employees in 2004 to 1.9 million in 2014, and over 2 million by 2022. Social assistance employment grew from around 1.2 million workers in 2004 to about 1.4 million in 2014, and almost 1.6 million in 2022.

FIGURE 10. EMPLOYMENT GROWTH SINCE 2004 BY CATEGORY

In terms of growth relative to the share of nonprofit employment, education services employment experienced the most significant growth. In 2002, education services made up 15 percent of all nonprofit employment, yet this category explains 26 percent of the growth in nonprofit employment since 2004. Meanwhile, health care employment made up 52 percent of all nonprofit employment in 2002, which is closely matched with the fact this category makes up 58 percent of the growth in nonprofit employment since 2004. Social assistance employment growth explains 12 percent of the total growth in nonprofit employment since 2004. The remaining 5 percent is explained by arts & entertainment, religious, grantmaking, and civic employment.

Given that 70 percent of the growth in nonprofit employment can be attributed to health care and social assistance employment gains, how does this growth look in the context of broader health care and social assistance related jobs? Reviewing BLS data since 2004 shows the labor market has added roughly one million nurses, one million physicians, almost 600,000 outpatient care workers, 300,000 dentists, 300,000 childcare workers, and almost 200,000 assisted living workers.²⁰Bureau of Labor Statistics. “Current Employment Statistics (CES),” BLS.

In total, just six types of workers make up labor market gains of about 3.4 million new workers in health care and social assistance jobs. Given that 40 percent of both health care and social assistance jobs are typically within nonprofit institutions, it is likely less than half of these 3.4 million new jobs were provided by the nonprofit sector.²¹United States Census Bureau. “American Community Survey Data (ACS),” August, 2023. https://www.census.gov/programs- surveys/acs/data.html

Reviewing nonprofit employment trends in recent years and decades, it seems implausible this growth is the result of increased funding from foreign nationals or those seeking to influence American politics. Instead, the strong growth in health care and social assistance employment may be more likely the result of a rapidly aging population, leading to an increased demand for health care services, nursing homes, and home health care. There has also been a shift toward outpatient and home-based health care services, driven by cost-saving efforts and patient preferences.²²Deloitte Center for Health Solutions. Growth in outpatient care: The role of quality and value incentives. Deloitte, 2018. Consequently, this spike has presumably led to increased job opportunities in areas like home health aides, outpatient clinics, and ambulatory care centers.

The real question lawmakers face is not whether the growth in the number of nonprofits is warranted in general, but whether the laws regarding public benefit that distinguish nonprofit health care entities from their for-profit alternatives are enforced and appropriate for today’s health care industry. That is not a question addressed in this report, but an example of how lawmakers must take a careful, thoughtful approach to their perceived problems, rather than targeting the nonprofit sector as a whole.

Growing Nonprofit Sector Means More Charitable Assets

As the number of 501(c)(3) organizations increase over time and the employment of workers supporting these organizations grows in tandem, it should be no surprise we also see growth in the assets of charitable organizations over time. However, this too has been a topic of controversy among those concerned with the growth of the nonprofit sector.²³House Committee on Ways and Means. December 13, 2023. Critics of asset growth in the nonprofit sector have said “the tax-exempt economy commands 15 percent of Gross Domestic Product (GDP), roughly equal to the GDP of California.”²⁴Hodge, Scott. “Reining in America’s $3.3 Trillion Tax-Exempt Economy.” Tax Foundation. 2024. https://taxfoundation.org/research/all/ federal/501c3-nonprofit-organization-tax-exempt/

Aside from the fact that a robust and growing nonprofit sector serving societal needs should be expected to experience asset growth to support their charitable work, there are also serious problems with measuring data on assets. For example, the data on assets include tangible property such as the office spaces a nonprofit uses to carry out its work. For medium-sized organizations with assets between $1 million and $10 million, land, buildings, and equipment make up one- third of organization assets.²⁵Internal Revenue Service. “SOI Tax Stats – Charities & Other Tax-Exempt Organizations Statistics,” Table 1.

This means significant increases in real estate values, such as seen since 2012, artificially inflate the perceived asset values of nonprofit organizations. Another problem is measuring the growth in assets against GDP. If the same approach is applied to household assets, it could be argued household assets reached 536 percent of GDP in 2020, or that corporate assets reached 187 percent of GDP the same year. In this context, the 15 percent of GDP claim does not make much sense.²⁶Federal Reserve. “Financial Accounts of the United States – Z.1,” March 7, 2024. https://www.federalreserve.gov/releases/z1/

Issues with measuring nonprofit asset data aside, organizations serving social needs and providing vital support to local communities will need growing assets, new equipment, bigger facilities, and greater financial resources to advance their charitable missions. The very term “asset” connotes wealth and stockpiles of personal gains.

However, it is critical to understand what the assets of nonprofits are, and to recognize the difference between private-sector assets that accrue to individuals or shareholders, and those of nonprofits which may not be distributed as profit to stakeholders. The issue is not how much nonprofit organizations have in charitable assets, but whether their funds are coming from government or individuals uniting to support a shared charitable mission.

What About 501(c)(4) Organizations?

While this analysis provides an in-depth review of the growth trends of nonprofit organizations in recent decades, the observations are primarily focused on 501(c)(3) organizations as this category of nonprofits makes up over 80 percent of nonprofit organizations. Recently, however, critics of nonprofit organization growth have also included criticism of the second largest nonprofit category, 501(c)(4) organizations.

As this analysis presented in Figure 4 demonstrates, growth in the number of 501(c)(4) organizations hasn’t been seen in recent years. In fact, a 46 percent decline in the number of operating social welfare organizations has been observed in the 13 years since 2010. The criticism of 501(c)(4) organizations, therefore, is not centered on growth but on perceived nonprofit involvement in political activities.

The 501(c)(3) organizations are prohibited from engaging, either directly or indirectly, in any form of participation or intervention in a political campaign for or against any candidate seeking elective public office. Meanwhile, 501(c)(4) organizations may engage in political campaigns, provided such activities are not the organization’s primary activity.²⁷Audit Technique Guide – IRC Section 501(c)(4), Civic Leagues, Social Welfare Organizations, and Local Associations of Employees. Internal Revenue Service, 2017.

To qualify as a social welfare organization under Internal Revenue Code (IRC) Section 501(c)(4), an organization must be operating exclusively for the promotion of social welfare and must not be organized for profit. This standard is met if the organization is primarily engaged in activities that in some way promote the common good and general welfare of the community. A 501(c)(4) organization’s attempts to influence legislation are considered activities that further IRC Section 501(c)(4) social welfare purposes if that legislation is germane to accomplishing its mission.

The Anatomy of a Typical 501(c)(4) Organization

The key to understanding the functions of a typical 501(c)(4) organization is knowing what the broader social welfare organization subsector looks like, what types of organizations operate in this space, and how many of them are actively engaged in lobbying and political activity. One 2016 analysis by the Urban Institute randomly sampled 100 501(c)(4) organizations with revenues greater than $25,000 to observe a typical 501(c)(4).²⁸Koulish, Jeremy. Urban Institute, January 2016. The author found the most common type of organization (39 percent) were community service organizations (i.e. Rotary Clubs, Kiwanis Clubs, and Lions Clubs), followed by sports and recreation clubs (10 percent), and veterans’ organizations (8 percent). The author summarizes these findings by saying a “clear majority of social welfare organizations can be naturally categorized as voluntary associations that offer some broader community benefit.”

Building on such research, the Philanthropy Roundtable examined more recent data to better understand the current landscape of 501(c)(4) organizations. Using 2022 IRS data on 990 filings of Section 501(c) (4) organizations, data was pulled from a random sample of four organizations for each state, including Washington D.C.²⁹Internal Revenue Service, Exempt Organizations Business Master File. The analysis only includes organizations with annual revenues of at least $50,000, and the final sample included 204 organizations. This is not a representative sample of the entire sector, but a randomized qualitative snapshot of the subsector.

Figure 11 shows the breakdown of the sample of 204 organizations by type of organization. The most common 501(c)(4) organizations are sports associations, making up 15 percent of 501(c)(4) nonprofits. This includes groups such as athletic associations, tennis associations, hunting clubs, and soccer clubs. The second most common social welfare organizations are volunteer fire departments, and community improvement organizations, both making up 8 percent of 501(c)(4)s in our sample. Community improvement organizations include revitalization groups, workforce development associations, and farmers markets. Homeowners associations also make up a sizable share (7 percent) of 501(c)(4) organizations in the randomized sample.

Figure 11. 501(c)(4) Organizations by Type

*The “Others” category includes organizations that make up a smaller share of 501(c)(4) organizations, including fireman’s associations, disaster relief groups, arts/culture organizations, public-benefit corporations, water resources management, and foreign affairs associations.

Limiting the analysis to 501(c)(4) organizations with revenues above $50,000, the median annual revenue of the sample of 204 organizations is $202,500, representing the typical annual revenue of a 501(c)(4) organization in this sample. The actual median is likely to be lower as those with less than $50,000 in revenue were excluded from the analysis. Digging deeper into the IRS Form 990 data from the sample of 501(c)(4) organizations determines what share of these organizations had any expenditure on lobbying efforts during 2022.

Analysis finds one-in-ten (10 percent) 501(c)(4) organizations spent money on lobbying activity, while 90 percent did not spend any money on lobbying activity. Among the subset that did spend money on lobbying activity, the median share of functional expenses spent on lobbying was 10.8 percent. In other words, 90 percent of 501(c)(4) organizations typically do not engage in any lobbying activities, while those that do only spend about 10 percent of their total expenses on lobbying efforts. Figure 12 below reveals the share of 501(c)(4) organizations that engaged in lobbying when observing the 2022 randomized sample of 204 social welfare organizations.³⁰While the data reviews the share of individual organizations engaged in lobbying activities, this might not capture national or statewide organizations that lobby on behalf of their members.

FIGURE 12. SHARE OF 501(C)(4) ORGANIZATIONS THAT ENGAGE IN LOBBYING

Next, all 204 form 990s were reviewed to determine what share of the sample included any expenditures on political campaign activities or voter education efforts. Analysis revealed 4 percent of social welfare organizations engaged in political activities or voter education efforts in 2022. Figure 13 below shows 96 percent of 501(c)(4) organizations from the randomized sample of 204 organizations did not engage in any political campaign or voter education activities.

Among the subset that did spend money on these activities, the median share of functional expenses spent was 13.4 percent. These findings are largely consistent with prior analysis that uses key search terms applied to IRS data, which found that roughly 97 percent of 501(c)(4) organizations are not engaged in any political activity.

FIGURE 13. SHARE OF 501(C)4 ORGANIZATIONS ENGAGED IN POLITICAL ACTIVITIES

What Share of 501(c)(4) Organizations Are Engaged in Political Activity And/or Policy Advocacy?

Recent years have witnessed growing calls by policymakers to investigate 501(c)(3) and 501(c)(4) organizations over concerns around donations to nonprofit organizations being funneled into potential US political activity.³¹Salmon, Jack. “Donor Disclosure Means Less For Charities And Those They Serve.” Philanthropy Roundtable. September 2023. Data and literature on the political activities and policy advocacy of 501(c)(4) organizations are abundant. All too often, terms such as political activity and policy advocacy are conflated. Political activity involves direct or indirect participation in political campaigns, while policy advocacy refers to efforts to influence public policy, such as lobbying for or against legislation.

One of the most common methods of calculating the share of social welfare organizations actively engaged in political activities or policy advocacy is the “search term” methodology. Filtering 501(c)(4) organizations by applying ideologically loaded terms (i.e., grassroots, action, citizen, etc.) to search criteria gives a helpful indication in answering this question. Below, Table 2 reveals the results from three different analyses conducted in 2013, 2016, and 2023 by the Urban Institute and Philanthropy Roundtable, respectively.

All three search term studies found similar results: between 2 and 3 percent of 501(c)(4) organizations are engaged in either political activity or policy advocacy efforts. In other words, roughly 97-98 percent of these social welfare organizations are likely not engaged in such activities, although they may legally take public advocacy positions.

Table 2. Studies on the Share of 501(c)(4) Organizations Engaged in Political/Policy Activity

Study	Data Year	Number of Organizations	Percent Engaged in Political/Policy Activities
Urban Institute (2013)37Koulish, Jeremy. “There Are a Lot of 501(c)(4) Nonprofit Organizations. Most Are Not Political.” Urban Institute (2013).	2012	86451	2.4%
Urban Institute (2016)38Koulish, Jeremy. “From Camps to Campaign Funds: The History, Anatomy, and Activities of 501(c)(4) Organizations.” Urban Institute, January 2016.	2014	81490	2.7%
Philanthropy Roundtable (2023)39Salmon, Jack. “Donor Disclosure Means Less Money For Charities and Those They Serve.” Philanthropy Roundtable, September 2023.	2022	74065	2.6%

Nonprofit Advocacy is in Decline

Both sides of the political aisle appear apprehensive about nonprofits of any IRS category engaging in policy work. This concern stems from a mistaken conflation of policy advocacy and political giving. Some lawmakers worry nonprofits are misusing their advocacy role to influence elections. There is no evidence to support this claim. In actuality, data indicate nonprofit engagement in policy advocacy is declining.

In a recent Independent Sector study, “Nonprofit Advocacy & Civic Engagement Research,” findings revealed a significant decline in the number of nonprofits engaged in advocacy or lobbying. Based on a nationally representative survey and a qualitative study, the analysis highlighted two main points. First, the number of nonprofits reporting advocacy activity has decreased 31 percent over the past twenty years. Second, the study indicated many nonprofits are unaware or confused by their legal ability to lobby. This confusion undermines nonprofits’ participation in important debates and consequently adversely impacts the relationship between nonprofits and democracy.

In 2000, more than half (54 percent) of 501(c)(3) charities knew they could endorse or oppose federal legislation. Today, only 32 percent are aware of their legal right to do so. While some nonprofits fear legal repercussions in response to advocacy activities, the study’s researchers say advocacy and civic engagement are “critical” and “key deterrents of nonprofit and sector health.”³²Independent Sector “Nonprofit Advocacy and Civic Engagement Research”https://independentsector.org/policy/advocacy-research/

Despite massive growth in the nonprofit sector over the past decades, the same time period evidenced a decline in nonprofit advocacy. Criticisms that nonprofit growth equates to a jump in electioneering or lobbying are unfounded. As evidenced by the Independent Sector’s study, there is actually a sharp decline in advocacy activity.

This decline is particularly concerning as it suggests a hindering of the vital role nonprofits play in civic discussion. Nonprofits fuel innovative ideas that address issues ranging from homelessness to education.³³Elizabeth McGuigan. Policy Philanthropy and Its Key Role in Civil Society. November 22, 2022. Philanthropy Roundtable. https://www.philanthropyroundtable.org/resource/policy-philanthropy-and-its-key-role-in-civil-society/ Their diverse perspectives are exactly what makes them crucial in the policymaking arena. The complex challenges rarely have simple, one-size-fits-all solutions devised by a bloated central government.

What About the Transfer of Funds from 501(c)(3) to 501(c)(4) Organizations?

One final critique that has been raised by critics of growth in the nonprofit sector is whether 501(c)(3) charitable organizations are transferring funds to 501(c)(4) social welfare organizations, which have less restrictive rules surrounding political and lobbying activities. These concerns are largely based on anecdotes as there is not sufficient data on the flow of funds between nonprofit organizations. What is known is IRS regulations provide stringent rules governing the transfer of funds from 501(c)(3) organizations to 501(c)(4) organizations.

One of the foundational principles guiding 501(c)(3) organizations is the prohibition against private benefit. Under IRS regulation 1.501(c)(3)-1(d)(1)(ii), a 501(c)(3) organization must be organized and operated exclusively for exempt purposes set forth in section 501(c)(3), and none of its earnings may inure to the benefit of any private individual or shareholder.³⁴Code of Federal Regulations. “1.501(c)(3)-1(d)(1)(ii).” https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR062882ac6495890/section-1.501(c)(3)-1 The transfer of funds to a 501(c)(4) organization can violate this principle by providing an impermissible private benefit to the 501(c)(4), which is not held to the same standard of charitable purpose as a 501(c)(3). Therefore, such transfers are heavily restricted to ensure compliance with this regulation.

In the rare instances where a 501(c)(3) organization might transfer funds to a 501(c)(4), the 501(c)(3) must adhere to stringent expenditure responsibility requirements as outlined in IRS regulation 53.4945-5(b).³⁵Cornell Law School. “26 CFR § 53.4945-5 – Grants to organizations.” https://www.law.cornell.edu/cfr/text/26/53.4945-5 This regulation says the 501(c)(3) organization must: (1) Conduct pre-grant inquiries to ensure the recipient 501(c)(4) will use the funds for charitable purposes. (2) Require the recipient to sign a written agreement detailing the charitable purposes for which the funds will be used. (3) Maintain detailed records of how the funds are spent. (4) Require periodic reports from the recipient to demonstrate compliance. (5) Ensure the funds are segregated in a separate account to prevent commingling with non-charitable funds. Failure to exercise these responsibilities can lead to penalties and jeopardize the tax-exempt status of the 501(c)(3) organization.

Another critical regulation is the prohibition of excess benefit transactions under IRC Section 4958.39 This regulation is designed to prevent 501(c)(3) organizations from engaging in transactions that provide an excess benefit to disqualified persons, which could include certain insiders or the 501(c)(4) organization itself if the 501(c)(3) organization does not receive fair value in return for what it provides in a transaction. If a 501(c)(3) organization transfers funds to a 501(c)(4) and receives less than fair market value in return, this constitutes an excess benefit transaction. Such transactions are subject to excise taxes, and the individuals involved could face significant financial penalties.

While the general rule prohibits transfers from 501(c)(3) to 501(c)(4), there are narrow exceptions under which such transfers might be allowed: (1) Payment for Fair Market Value: A 501(c)(3) can pay a 501(c)(4) for specific goods or services that directly further the 501(c)(3)’s exempt purposes, provided the payment reflects fair market value. (2) Cost-Sharing Arrangements: If the organizations share costs for joint activities, the methodologies used must be reasonable and well-documented to ensure compliance. (3) Grants with Expenditure Responsibility: Transfers can occur if the 501(c)(3) exercises full expenditure responsibility to ensure the funds are used solely for charitable purposes as outlined above.

In sum, IRS regulations establish a rigorous framework that largely prohibits the transfer of funds from 501(c)(3) to 501(c)(4) organizations. This is primarily to prevent the misuse of charitable funds and ensure tax-exempt resources are used exclusively for purposes that justify their favorable tax status. While certain narrow exceptions exist, they are subject to intense scrutiny and detailed regulatory requirements. Non-compliance with these rules can result in severe penalties, including excise taxes and the loss of tax-exempt status, underscoring the importance of adherence to these regulations.

A Government Accountability Office (GAO) report covering fiscal years 2010 to 2017 found the IRS, through its data-driven analytics efforts, conducted and closed 226 examinations of nonprofit organizations in an eight-year period.³⁶U.S. Government Accountability Office, Campaign Finance: Federal Framework, Agency Roles and Responsibilities, and Perspectives (Feb. 2020). Among those examinations, 90 percent were conducted and closed with no changes to the tax- exempt status of organizations, while just twenty-two organizations (10 percent) faced further action from the IRS, including revocation and termination.

Conclusion

The analysis of nonprofit sector growth over the past twenty years reveals a complex and nuanced picture. While the total number of nonprofit organizations has grown by 36 percent since 2000, this growth has been driven entirely by an increase in the number of operating 501(c)(3) organizations, while the number of operating 501(c)(4) and 501(c)(6) organizations have experienced significant decline. Almost six-tenths of the growth in 501(c)(3) organizations between 2002 and 2022 is rooted in the growth of human services and public and social benefit organizations. The data reveal most of the growth in the volume of 501(c)(3) organizations in recent decades is primarily in response to growing demand for social services.

Nonprofit sector employment has shown resilience, particularly during economic downturns such as the financial crisis. This resilience has led to a notable increase in nonprofit employment, which has outpaced private sector employment growth during certain periods. Specifically, between 2007 and 2022, nonprofit employment grew by 20 percent compared to the private sector’s 14 percent growth.

However, since 2010, private sector employment has increased by 21 percent, surpassing the nonprofit sector’s 18 percent growth. Despite this, the absolute number of new jobs created in the nonprofit sector (3.8 million) remains significantly lower than in the private sector (23 million). Most of the growth in nonprofit employment can be attributed to health care and social assistance employment gains.

When observing 501(c)(4) organizations, search term analysis reveals between 2 and 3 percent of 501(c)(4) organizations are engaged in political activities and/ or policy advocacy, while a randomized review finds about 4 percent of 501(c)(4) organizations are engaged in such activity. In other words, roughly 96-98 percent of these social welfare organizations are likely not engaged in such activities, although they may legally take public advocacy positions.

Contrary to concerns about increased policy activity, data indicate a decline in nonprofit advocacy. Many nonprofits are unaware of their legal ability to lobby, which has led to a 31 percent decline in participation in important policy debates, thereby impacting their role in civic engagement.

It is important to address legitimate concerns of policymakers regarding organizations that violate existing laws and regulations, particularly those tied to foreign government funding or terrorist groups. At the same time, policymakers should avoid applying a broad-brush approach to the charitable sector that could inadvertently harm the vast majority of organizations doing remarkable work in their communities. While a small fraction of these organizations actively engage in policy debates, this is a crucial role of civic society that must be protected as policymakers continue to engage in oversight.