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Federal agencies play a significant role in the funding of many nonprofit organizations. Their role is particularly noteworthy among those types of nonprofits — such as healthcare and human services — that rely most heavily on government grants (not all of them competitively awarded)  in their funding mixes.


This post explores the value of government grants and tax subsidies to the nonprofit and charitable sector, and the funding phenomena of crowding in and crowding out.


Federal Grants and Tax Subsidies:

In An Overview of the Nonprofit and Charitable Sector (2009) the Congressional Research Service (CRS), estimated that grants amounted to about $100 billion each year in value to the charitable sector. Federal agencies supplied about 90% of the funds; state and local agencies supplied the balance.


Beyond direct grants, federal tax subsidies each year were from $115 to $130 billion in value, and state and local tax subsidies were from $30 billion to $50 billion in further value. As a sum, government agencies — at local, state, and federal levels — provided a value of from $245 billion to $280 billion to the nonprofit and charitable sector via grants and tax subsidies.


In the four years since this study, in response to the Great Recession, the total value of federal support to the nonprofit and charitable sector has increased. At the same time, in response to the same economic phenomena, the total value of state and local support to the sector has decreased.


Crowding In and Crowding Out:

Federal spending in support of the nonprofit and charitable sector can stimulate support from other sources. Such government funding of nonprofit or charitable activities can serve as a signal of institutional quality. In this case, when a government agency increases funding to a specific charitable sector or organization, private funding also increases. The observed phenomenon is called crowding-in. It occurs when government spending leads to additional private sector spending.


The CRS has observed that: “Federal support appears to have a crowding-in effect at any level, while local support initially crowds in at low support levels but begins to crowd out at higher levels of support.” In other words, local resources, regardless of source, can only go so far.


Public Spending Complements Private Spending:

It’s possible that the one source of funding complements rather than displaces the other source. Over the past few decades, social welfare spending at all levels of government has risen steeply, while the rate of growth in charitable giving has remained relatively flat.


This trend lends weight to the argument that the government and the nonprofit/charitable sector complement one another’s resources in the aggregate, rather than act as substitutes. If they were in fact substitutes, observers would have expected that as public spending for social welfare had risen, private spending for it would have fallen.


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