* US charities to feel lag effects of recession in 2010
* "Gems" could be lost as small nonprofits close
By Michelle Nichols
NEW YORK, March 24 (Reuters) - Thousands of small U.S. charities are likely to close this year as cautious donors and governments tighten spending and some states consider removing nonprofit tax breaks, experts said on Wednesday.
The nonprofit sector is preparing for this year to be harder than 2009 as the delayed effects of the worst U.S. recession hits philanthropic budgets, experts said during a panel discussion on "The New Nonprofit Reality."
"States are looking for any opportunity for tax revenue this year and nonprofits are increasingly a very big target," said Stacy Palmer, editor of The Chronicle of Philanthropy.
"Foundation leaders are very worried that this economy is not doing so well and it's time for caution, so the groups that they're supporting are the tried and true groups -- the universities, the hospitals."
Hawaii has proposed a 1 percent tax on charities, Kansas is considering making nonprofits pay sales taxes and Pennsylvania is thinking about removing a property tax break for charities, The New York Times reported.
In a closely watched court battle, an Illinois hospital lost its property tax break last week as nonprofit hospitals come under pressure to justify the breaks they get.
"The nonprofit sector is like the caboose ... of the economy, so we often go over the cliff last and then we stay over the cliff even after the economy starts going up the other way," said Ken Berger, president and chief executive of Charity Navigator, which evaluates the nation's big charities.
"The teeny-weeny, little local community-based, grass-roots charities are hitting a brick wall."
There were 1.9 million nonprofit groups in the United States in 2006 accounting for 5 percent of gross domestic product, according to figures from Independent Sector. All are exempt from federal income tax.
The most prominent include the Red Cross and the Bill and Melinda Gates Foundation, but such organizations range from soup kitchens to religious congregations and cultural groups as well as the National Rifle Association.
U.S. donations to charities reached an estimated $307.65 billion in 2008, according to the Giving USA Foundation. It said 75 percent of that money came from individuals, 7 percent from charitable bequests, 5 percent from corporations and 13 percent from foundation grants.
Berger said just 6 percent of U.S. charities received 94 percent of donations and funding and almost half the country's charities had received less than $25,000 a year.
"The silver lining is that maybe there are too many super small organizations," he said. "But I also think some really wonderful groups could be closing their doors."
Tough times did not mean great nonprofits would rise to the top and weak groups would be culled, Palmer said.
"This is a year when we're going to see more nonprofits go under and ... it's not the fairest system," she said. "The scrappy nonprofits, the innovative groups, the grass-roots groups, those are the ones that lose out," she said.
"If states are pulling back, local communities can't provide these services, some nonprofits are faltering -- who's going to take care of some very needy people?" (Editing by Mark Egan and Chris Wilson)