Why Are Some Nonprofits More Equal Than Others?

A few enjoy large tax breaks while others, whose founders did not have the ear of government officials, do not.

In 1962, when no one in the State of Israel was yet talking about tycoons and the link between money and power, Levi Eshkol, finance minister at the time, gave a slip of paper to Baron Rothschild.

That slip of paper contained his promise that in exchange for donating the land on which the city of Caesarea was built to a foundation jointly owned by the state and the baron − the Rothschild Caesarea Foundation − and in exchange for the use of the revenues from the land to promote higher education in Israel, the state would collect no taxes from the baron’s foundation.

Although Eshkol’s promise was never anchored in law, from that time on − for more than 50 years − the agreement between the state and the foundation has been observed. The foundation, which manages all the land in Caesarea, receives billions of shekels in revenues, pays no taxes and promises to donate some of the profits to promote higher education.

The state comptroller’s 2012 report probed the work of the Rothschild Caesarea Foundation. It found that the foundation had revenues valued at NIS 1.3 billion and that over the years, it had accumulated a cash surplus of half a million shekels. In 2010, the foundation donated NIS 21 million − 1.6% of its revenue − to promote higher education.

The gap between the foundation’s enormous revenue and the tiny amount it donates every year to promote higher education has drawn quite a bit of criticism over the years. In 2006, the accountant general at the time, Yaron Zelekha, published a report in cooperation with the director of the Government Companies Authority, Eyal Gabbai, which asserted that the foundation’s structure “prevented the distribution of the enormous cash surplus that it had accumulated to the public goals for which it had been established, and so it created no incentive to use the large amount of land it possessed.”

In other words, Zelekha and Gabbai were hinting that the foundation had stopped serving the public purpose for which it had been created and began serving itself, its managers and its employees.

Back taxes sought

Accordingly, Zelekha and Gabbai recommended that the foundation be dismantled and that ways be found to minimize the many exemptions it enjoyed, such as exemptions from corporate tax, capital gains tax on real estate and capital gains tax. The Tax Authority even demanded that it pay NIS 140 million in taxes for the first half of the previous decade.

A spokesman for the Rothschild Caesarea Foundation commented, “In recent years the scope of the foundation’s donations has increased by roughly NIS 50 million per year. In addition, the foundation pays taxes in full on its business transactions.”

The government’s graciousness toward the baron raises the question of balance in generosity. Specifically, who in this case was more generous, and whether the baron’s generosity was actually worth it to the public − after 50 years of tax exemptions, generous salaries to the foundation’s executives and failing to put its assets to good use? It’s not at all certain that Rothschild’s generosity was worthwhile or fair, since others weren’t awarded the same benefits.

The tax benefits forecast of the State Revenues Authority, which was included in the proposed budget for 2013-2014, mentioned the lack of equality in the government’s treatment of various donors.

All nonprofit organizations are exempt from corporate tax and value-added tax. But several well-connected nonprofits, which received protection in the form of their own individual laws, get additional tax breaks such as exemptions from real estate taxes, taxes on capital gains and on interest, fees and municipal property tax, to name a few. No one knows who they are, since no one has a list.

The authority succeeded in identifying 10 of them by happenstance. Four receive their benefits as nonprofits that preserve the legacy of the country’s leaders and are legally exempt from paying taxes, such as the Yitzhak Rabin Center. The fifth is the Rothschild Caesarea Foundation.

Other organizations on the list are the Israel Academy of Sciences and Humanities, the Wolf Foundation, the Israel-U.S. Binational Industrial R&D Foundation and the Israeli Center for Human Culture, as the Van Leer Jerusalem Institute was known in the 1958 law that established it.

The State Revenues Authority, which is collecting, one by one, the names of nonprofit s that have laws exempting them from paying taxes, cannot even estimate the cost of the tax exemptions. It seems that since they are nonprofit organizations anyway, the cost of their exemptions is not all that high except for the Rothschild Caesarea Foundation. Still, one cannot help but wonder about the odd composition of the list, which spreads out over several decades of laws passed to benefit them.

It’s obvious that there is no logic in giving tax exemptions to specific organizations. In what way is the Van Leer Institute preferable to the Taub Center, for example? Both institutions research social and economic policy, so why should one pay taxes while the other does not? How is the Wolf Foundation better than foundations established by others? The only reason is that Baron Rothschild, or the Wolf family, knew how to put pressure on the government by making their donations conditional on generous exemptions.

All these organizations made large, important donations. Baron Rothschild donated the land on which Caesarea was built. The Wolf family donated $14 million for the promotion of science in the 1970s. The BIRD Foundation donated $100 million ‏(half the amount came from the government itself‏). The list goes on. Still, these donations are no more important than other donations that did not get their donors an individual law exempting them from paying taxes. The time has definitely come to put things in order regarding tax exemptions for large donations. 

Moshe Pridan