Update – Charitable Deduction Debate:

The Sides Are Clear, But Are We Prioritizing Giving Incentives Correctly?

As we reported yesterday on this site, the Senate Finance Committee held a hearing on Tuesday concerning an Administration proposal to trim back a portion of the federal tax deduction applicable to high-dollar donors who itemize. And to no ones surprise the hearing was quite animated in how it produced divergent opinions on the matter.
Here’s a sample:

Republican Sen. Orin Hatch (R-UT) The ranking Republican on the committee emphasized that, “There has been a charitable deduction in the tax code for nearly a century, and the proposals on the table would undo it.”  …“This is not the area for experimentation by the federal government.”

Committee Chair Sen. Max Baucus (D-MT), emphasized how the current structure was unfair seeing as many get no benefit from their donations because they do not itemize. Furthermore, he raised the question if some charities get bigger donations because of their particular ability to attract high-income donors. Those who are in larger tax brackets, thus essentially subsidized in their own giving.

Testifying witnesses on the matter were a mix of both national nonprofit professionals, and constituents of the Senators.

Brian Gallagher, President of United Way Worldwide, noted the proposal could could cut charitable giving by $2.9-billion to $5.6-billion a year. “That equates to eliminating all of the private donations each year to the Red Cross, Goodwill, the YMCA, Habitat for Humanity, the Boys and Girls Clubs, Catholic Charities, and the American Cancer Society combined,” he said.

Senator Hatch then brought Dallin H Oakes, Elder of the Church of Latter Day Saints and former President of Brigham Young University as a witness. Much like the Senator he emphasized the charitable deductions importance but couched the sector as part of a privatized system. Saying, “I speak of educational institutions, hospitals, social welfare agencies and innumerable other organizations ministering to the needs of children, youth, the aged, the poor and citizens generally.” …”The financial well-being of this private sector is dependent upon private contributions that qualify for the charitable deduction. And the impact these private institutions have on those they serve is magnified by the millions of volunteers motivated by the ideals they pursue.”

While several other witnesses testified to a myriad of other slight tweaks that could be made to the current structure, two expert witnesses, in written testimony, may have presented the most important questions for consideration in this debate.

Roger Colinvaux, an academic at the Catholic University of America, and a former staff member on the Joint Congressional Tax Committee,  emphasized a need to look not merely at adjusting tax rates for all donations, but suggests the need to examine the current nature of where deductible donations are allowed. It may not make sense for all tax-exempt charities, a very broad category, to be eligible for tax-deductible contributions he stated by saying, “The focus on any such examination should be on whether existing rules are maximizing the public benefit at the lowest cost to taxpayers,”

And that very question seems ripe for examination considering the findings of  Congressional Budget Office’s Frank Sammartino, who provides these illuminating graphs on giving trends of the the wealthiest American’s versus those of more modest means. The charts below show that those in the upper-end skew their larger gifts away from religious and basic-needs nonprofits, and instead turn increasingly to arts organizations, hospitals and educational organizations (mostly colleges.)

Source: Congressional Budget Office based on data from the Center on Philanthropy at Indiana University, Patterns of Household Charitable Giving by Income Group, 2005 (Indianapolis: Indiana University–Purdue University, 2007). Note a.: Combined purpose funds, such as the United Way, receive contributions and allocate them to many different types of charities.

While some in this debate refer to the nonprofit sector as “private,” the public, who is effectively subsidizing some of this giving through tax deductions, may demand some amendments in order to prioritize this massive swell of wealthy private giving more towards charities seen as serving a more fundamental public purpose – addressing issues of poverty, opportunity and other basic needs. Particularly during an age of government retrenchment, when services to these populations are being cut-back.

According to the Joint Committee on Taxation, the current charitable deduction will cost around $230 billion between 2010 and 2014 if left unchanged.
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