Income and outlays of households and of nonprofit institutions serving households

Survey of Current Business, April, 2003 by Charles Ian Mead, Clinton P. McCully, Marshall B. Reinsdorf

IN the, national income and product accounts (NIPA's), the personal sector comprises households and nonprofit institutions serving households (NPISH's). Since households and NPISH's are likely to differ in their circumstances and behavior, separate estimates of their income and outlays are of interest to many users of the NIPA's. As part of the comprehensive revision of the NIPA's scheduled for late 2003, BEA plans to introduce two new annual tables--one that provides separate estimates of the income and outlays of the household component and of the NPISH component of the personal sector and another that reconciles the new estimates for NPISH's to estimates in the Internal Revenue Service's (IRS) SOI Bulletin. The other NIPA tables will continue to show estimates for the personal sector, which consolidates households and NPISH's. This article provides background information on the new tables and presents some preliminary estimates.

The new estimates will help to distinguish the saving behavior of households and NPISH's in analyses of personal saving. They can also be used to answer questions about the importance of the nonprofit sector in the U.S. economy or in the provision of particular kinds of services, such as health care and recreation. The estimates of transactions between the household sector and the nonprofit institution sector can help to answer questions about the sources of revenue for NPISH's, including charitable giving, and about the NPISH's use of this revenue. Finally, the System of National Accounts 1993, which specifies international guidelines for preparing national accounts, places households and NPISH's in separate sectors. (1) The separate estimates for the household and NPISH sectors will therefore aid in comparisons of the United States with other countries.

Definition of NPISH's

An important criterion for classifying an organization as an NPISH is tax-exempt status, but many kinds of tax-exempt organizations do not qualify for treatment as an NPISH in the NIPA's. Some nonprofit institutions--such as chambers of commerce, trade associations, and homeowners' associations--are considered to serve businesses rather than households. These nonprofit institutions serving business are included in the business sector in the NIPA's. Some other nonprofit institutions that sell goods and services in the same way as for-profit businesses are also classified in the business sector. For example, tax-exempt cooperatives, credit unions, mutual financial institutions, and tax-exempt manufacturers--such as university presses--are treated as businesses.

The nonprofit institutions that are recognized as NPISH's provide services in one of the following five categories:

1. Religious and welfare, including social services, grant-making foundations, political organizations, museums and libraries, and some civic and fraternal organizations;

2. Medical care;

3. Education and research;

4. Recreation, including cultural, athletic, and some civic and fraternal organizations; and

5. Personal business, including labor unions, legal aid, and professional associations.

Almost all public charities are included in the first three categories, but a few are in the last two categories. Table 1 shows the industries in the North American Industrial Classification System (NAICS) that contain NPISH's. NPISH's account for more than half of the output in the following industries: Education; hospitals; social assistance; museums, historical sites, and similar institutions; and religious, grant-making, civic, professional, and similar organizations.

Measurement of output and income of NPISH's

Most of the output of NPISH's is considered to be purchased by persons, and the personal consumption expenditures (PCE) component of gross domestic product (GDP) includes the value of this output. The output of NPISH's is valued at its cost of production, an approach that distinguishes the treatment of NPISH's from the treatment of businesses in the NIPA's. Business output that is sold to customers is valued at the amount that they pay.

For businesses, sales generally exceed operating expenses, which include compensation of employees, purchases of intermediate inputs, indirect business taxes, and consumption of fixed capital (depreciation). For NPISH's, on the other hand, the relationship between sales and expenses is often the reverse: receipts from sales of program services are usually not expected to cover operating expenses. Instead, most nonprofit institutions rely on contributions, government grants, or dividend and interest income to cover at least a portion of their operating expenses. Because revenues from sales of services may be far below the cost of producing the services, sales are not a good measure of the value of NPISH output. However, the expenses that NPISH's incur to produce their output are a meaningful measure of the value of this output. (2)

The treatment of the income that helps NPISH's to fund the gap between their expenses and their sales depends on its source and nature. Transfers that NPISH's receive from households--or make to them--are excluded from personal income because they are intrasector transfers in the consolidated accounts of households and NPISH's. On the other hand, transfers that NPISH's receive from business and government are included in personal income, as is the property income that NPISH's receive as rental income, dividends, and interest. (3)