We Can Make Changes to the Charitable Deduction that Benefit Nonprofits With No Loss or Even an Increase in Revenues

Eugene Steuerle

By C. Eugene Steuerle
Richard B. Fisher Chair and Institute Fellow, The Urban Institute
Co-Founder, Urban-Brookings Tax Policy Center and Urban Institute Center on Nonprofits and Philanthropy

I was honored to meet with a highly engaged and well-informed group of funders at Philanthropy New York last week to examine the potential ramifications of various tax reforms currently being debated in Washington. Many expressed interest in the proposals to reform the charitable deduction that I presented the previous week to the House Ways and Means Committee.

We didn’t have time during our meeting to delve deeply into those proposals, but since there was interest in exploring them in greater detail, I was invited to pass on these remarks to a wider audience of funders and nonprofits.

My testimony to the Committee largely centered on one point: A tax subsidy—like the one for charitable contributions—should be treated like any other government program in the sense that it should be examined regularly and reformed to make it more effective.

The good news is that the charitable deduction can be redesigned to strengthen the charitable sector and increase charitable giving at the same or even lower revenue cost. What’s the trick? Simply put, take the revenues that are spent with little or no effect on charitable giving, and reallocate some or all of them toward measures that would encourage giving more effectively.

For example, to increase giving, Congress can:

  • Create a charitable contribution for all taxpayers, not just itemizers
  • Allow people to make contributions until the filing of their tax return or April 15
  • Make it easier for people to donate from accumulated amounts, such as retirement accounts and lottery winnings
  • Remove or reduce (and certainly simplify) the dysfunctional excise tax on foundations.

Congress can more than pay for these changes with little or no reduction in giving if it would:

  • Put a floor under deductions, which would have little effect on giving incentives (e.g., only giving in excess of 1 percent of income would be deductible)
  • Reform subsidies that tend to be highly ineffective and invite abuse, such as the deduction for household goods and clothing (where problems are likely more egregious than with the automobile deduction, which Congress recently reformed)
  • Provide a better information system for charitable gifts.

Certainly expanding the deduction to nonitemizers almost requires some offset like a floor for administrative reasons. The IRS does not and cannot properly enforce the rules for many charitable contributions already.

Some of those items might raise some eyebrows among funders and nonprofits. They were, however, well received by representatives of both parties on the Committee, who asked many questions about them. I don’t presume to have all of the answers here, but I think the interest of Committee members derived from its need to move beyond a “them vs. us” mentality in approaching charitable deduction and other tax reform issues. I invite Philanthropy New York members to read this nine-page written testimony to get a quick summary of some of these ideas and to add to them.

While some of the proposed changes to the charitable deduction being bandied about Washington these days could be quite detrimental to the nonprofit community, that doesn’t mean reforms should not be considered at all. Moreover, I believe that we are in the midst of a fundamental transformation of government, whether we want it or not, and that it will entail changes on the order of hundreds of billions of dollars each year, not just over time (our deficit alone has been running about $1 trillion each year for several years now).

The goal in this transformative period—liable to last for many years—should be to strengthen all sectors: government, nonprofit, business and household. We are all in this together.

With assistance from Michael Hamill Remaley, Vice President of Communications & Public Policy, Philanthropy New York.

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