By The Charitable Giving Coalition
This is the second of a two-part series extolling the virtues of the charitable tax deduction, a century-old American tradition. Earlier this week, we examined some key reasons why the charitable deduction is so vital to America’s communities. The reasons are too many for a single post!
So, today, we’re continuing the conversation with five additional thoughts about this tax provision that helps support a strong nonprofit sector, millions of people in need and thriving communities. Lawmakers should keep them in mind as they consider upending the charitable deduction as part of tax reform and addressing the budget deficit.
We know there are plenty more ways to demonstrate the importance of protecting the charitable deduction. Take a look. What other reasons can you think of?
Encouraging charitable giving makes the tax code fairer.
Since 1917, our tax code has recognized the value and fairness of the charitable deduction. Charitable donations benefit the people and communities that are served by charities and the philanthropic sector, and provide critical support to our communities and the most vulnerable among us. By allowing those who give so generously to claim a deduction at the same rate at which taxes are paid, our long-standing tax policy has ensured that such gifts are not subject to additional tax. Fairness requires that charitable donors not be taxed on money donors do not have, and on income they do not retain.
Private donations allow dollars to go further.
In 2012, Americans donated more than $300 billion to support charitable causes, according to Giving USA, with itemized giving comprising more than 80 percent of the total estimate for individual giving—nearly $229 billion.
There are numerous studies that suggest many taxpayers are more responsive to the tax incentive for charitable giving and their dollars support diverse charities (religious, social, educational, etc.). In fact, a recent study issued by the Urban Institute says “if the goal of the deduction is to increase giving, then one might be most concerned about proposals that would pare it back more among the most responsive givers.”
Nonprofits rely on private donations now more than ever as government funding declines and the demand for support services increases. In fact, many charities, such as arts organizations, churches, synagogues, and rescue missions, rely almost exclusively on private donations. A recent Urban Institute study provides the results of the first national survey documenting the serious and widespread problems experienced by nonprofit human service providers under contract with governments throughout the country. Specifically, the research found that many organizations cannot consistently rely on government support because of failure to make payments for contracted services, inability to meet legal requirements, and bureaucratic inefficiency. That all adds to the burden and costs for nonprofits. Charitable contributions received above and beyond fee for service payments represent the “extra dollars” that serve to “keep the doors open” so that vital human service needs can be fulfilled.
America’s rich history of charitable giving is weaved into our society’s fabric.
Americans have always been a generous people, and charities and contributions are as old as the republic. However, with the introduction of an income tax in 1913, valid concerns were raised regarding the viability of charities if the new taxes threatened the stream of contributions from generous Americans. Subsequently, there are two principle rationales for the charitable contribution deduction. First, it is viewed as a necessary adjustment to properly measure income, the so-called “base-defining” rationale as contributions are not part of private consumptions. Second, the deduction is viewed as a government subsidy to help organizations provide certain services, foster giving as a social value, and provide a means for individuals to choose which organizations they wish to support. Clearly, the subsidy rationale has roots in the overall First Amendment right of free association.
Tax-exempt organizations adhere to high standards and transparency.
An overwhelming number of charitable organizations adhere to standards of openness and transparency and comply with reporting requirements regarding donations and annual filings with the IRS. While there can be abuses in any walk of life or aspects of the tax law, this is no reason to disrupt a tax policy that has been in place since 1917 and has undergone numerous refinements to ensure adherence to proper compliance procedures. Additionally, present law and regulations require most exempt organizations to file annual information returns, making it easier to scrutinize their operations to determine whether they continue to be entitled to exemption, and, if so, whether they are subject to the tax on unrelated business income.
One of the virtues of the Internal Revenue Code and transparent operation of charitable sector (whose annual Form 990 filings are available for public inspection and easily downloaded through services such as GuideStar) is that public charities are judged each and every day by prospective donors who “vote with their pocketbooks” in deciding whether or not to support the organization.
Many charities – including universities and other large endowments and their investment earnings – qualify as tax-exempt because they support and fund the exempt purpose of the organization with which the revenue generated. They provide financial support for students, research, operating costs and preserve “intergenerational equity.” Such funds are crucial to the tax-exempt mission of the institution and deserve tax-exempt status.
Tampering with the charitable deduction hurts our communities and those who need it most.
Harmful tax policy changes to the charitable deduction will deliver a devastating blow to communities that rely on generous donors. If lawmakers chip away at our strong philanthropic tradition, we will all pay a profound price.
For example, if the president’s proposed 28 percent cap on charitable contributions is imposed, donations to the nonprofit sector could decline by more than $5.6 billion per year. That is more than the annual operating budgets of the American Red Cross, Goodwill Industries, YMCA of the USA, Habitat for Humanity, the Boys and Girls Clubs of America, Catholic Charities USA, and the American Cancer Society combined. These estimates are based upon the previous top marginal tax rate of 35 percent. The actual loss in charitable contributions could be worse in light of the new 39.6 percent tax rate.
The Tax Foundation issued a report recently that quantifies the economic impact of eliminating the charitable deduction. The findings reinforce the unique and vital role of the 100-year-old charitable giving incentive that fosters support for thriving communities and programs and services to help those in need. According to the report, eliminating the deduction would raise revenue that would be quickly lost – a loss that would be compounded in the form of jobs eliminated and a weakened economy:
- Reduce GDP by $40 billion
- Reduce employment by 131,000 full-time workers
- Increase tax revenues by up to $39 billion
- Reduce hourly wages by 0.2 percent