MAYBE the Congress and Senate will reach a new tax agreement in the next couple of weeks - anything is possible. Within this agreement is a proposal to cut charitable deductions. I am hoping that what goes on at the local, state and federal levels to affect your nonprofit's ability to pursue mission generally merits a conversation and subsequent action by your board. Depending on the outcome of the conversation, action can include board members reaching-out to their representatives and letting them know how their action can affect your nonprofit's work and consumers (beneficiaries). I am also thinking that the charitable deduction is one of these items.
What follows is a Wall Street Journal piece on the topic of the proposed elimination of the charitable deduction. It's a good conversation starter for your board - perhaps one of the last meetings of the year likely dedicated to some holiday theme and good cheer but hopefully leaving enough time to take care of business - like discussing the charitable deduction and depending on the outcome, discussing what actions each member will take. Such is the responsibility of a board.
Here's the piece.
Individual donations to charities grew 4% in both 2015 and 2016. That rate will swamp any tax effects.
A familiar and largely correct narrative holds that tax reform always fails because corporate special interests fight to protect the advantages their lobbyists have written into existing law. Now organizations representing the nation’s charities are getting into the act, lobbying Congress to preserve a tax structure that they say maximizes charitable giving.
From the left-leaning National Committee for Responsive Philanthropy to the more conservative Alliance for Charitable Reform, the charitable world’s main concern is the House bill’s proposal to double the standard deduction to as much as $24,400 per married couple. Today around 30% of taxpayers choose to itemize their deductions instead of taking the standard deduction. Charities reasonably suspect that these Americans would donate less if they could no longer benefit from itemization. Doubling the standard deduction could drive the percentage of taxpayers who itemize down to below 10%.
The Joint Committee on Taxation estimates that doubling the standard deduction could reduce the amount of deductible charitable contributions by nearly $100 billion, from $241 billion to $146 billion. But a drop in the amount of deductible gifts does not necessarily mean an equivalent drop in actual giving.
Any net loss of contributions would probably hurt the valuable work that charities do but, recessions aside, Americans have steadily increased their giving despite numerous tax law changes. Individual donations increased by 4% in 2015 and another 4% in 2016. If donations continue to increase at such rates, it won’t take long to make up for changes brought about by tax reform.
Nonetheless, the charity lobby is pushing hard for a “universal charitable deduction” allowing all taxpayers, itemizers and non-itemizers, to deduct contributions to charities. Independent Sector, which represents nonprofits and foundations, says such a deduction would raise nearly as much in new gifts as the House bill would take away.
But the universal deduction idea has problems. For one thing, it would reduce federal revenue by an estimated $13 billion and burden an already overloaded Internal Revenue Service bureaucracy with a greater number of returns requiring audits. More important, a universal charitable deduction would violate the widely acknowledged principle that reform should create a simpler, more neutral tax system.
Charities imagine themselves nobler than other interest groups because they look out for people. But offering tax breaks to sectors of society with worthy aims is a dangerous political game. Why shouldn’t mortgage brokers, for instance, get a tax break? They help people buy homes, and homeownership is a cornerstone of American social and economic mobility.
When the standard deduction was first proposed during World War II to ease the process of tax collection, churches and other charities formed the Council on Taxes and Philanthropy to advocate maintaining or even extending the charitable deduction system then in place. According to tax historian Joseph J. Thorndike, one clergyman warned in 1944 that the standard deduction would restrict “personal freedom” and be a step toward “fascism.” That hasn’t happened. Americans have continued to give to charities no matter what benefits the tax code conveys on them for doing so.
By calling for an additional deduction for giving, charitable organizations are essentially arguing that taxpayer funds should go to them instead of to the government. The nonprofit and philanthropic world may end up doing a lot of good with those extra funds, but the Americans they aim to help would almost certainly be happier with an expanded deduction. Especially if it means they get to hang on to more of their hard-earned money next year than they did this year.
Ms. Garment is a tax lawyer and a visiting scholar at Indiana University, where Mr. Lenkowsky is a professor emeritus of public affairs and philanthropy.