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The charitable giving deduction: a conundrum for fundraisers

December 16th, 2012 | Posted by Sarah in Fundraising Ethics | Policy and Government Grantmaking

As debate swirls about how to approach the “fiscal cliff”, the charitable giving tax deduction is at stake.

As the year-end draws near, the U.S. tax code is under the microscope, and the country anxiously awaits a decision on how elected officials will deal with the so-called “fiscal cliff.” Deductions for charitable contributions are among current tax policies under scrutiny. This has understandably generated quite a buzz among nonprofit administrators, who fear the potentially devastating impact that eliminating charitable deductions could have on their organizations.

As a fundraising professional, my Twitter feed and Facebook page have been filled with pleas from my colleagues to sign petitions, call legislators and otherwise vocally oppose changes to the charitable giving tax deduction.  As I sat down to do my due diligence and write to my representatives, I realized that I actually understood very little about the debate. Recognizing the position of bias I’m in, I set out to enlighten myself about the pros and cons of the charitable giving deduction as it stands.

With a little research, I learned about the basic arguments for and against the deduction:

Arguments to keep the deduction as-is

  • Simply put, the charitable giving deduction incentivizes wealthy individuals to donate large sums of money to nonprofit organizations.
  • Although some would call the deduction a “loophole” for wealthy Americans, the charitable giving deduction is of benefit to society. It is one of few things that can theoretically be construed as a win-win for the wealthy and the community as a whole.
  • Money donated to nonprofits as a result of the deduction fuels the nonprofit sector as an important creator of jobs in our country. Unlike many government grants, charitable contributions often provide unrestricted operating funds, which can be used to support the staff positions needed to run effective programs.
  • The charitable tax deduction allows individuals to decide exactly what is done with their public interest dollars. Donors can see the direct impact of their contributions, a great motivator for those who are suspicious of government spending.
  • The charitable tax deduction provides impetus for the nation’s wealthiest individuals to learn the needs of their communities. They must engage in conversations with those who are on the “front lines” of combatting issues such as poverty, violence, homelessness and others, in order to determine where their money will be best spent. The realizations they take away from these conversations fuel a greater involvement in social service.

Arguments to eliminate or cap the deduction

  • Congress’ Joint Committee on Taxation estimates that the government will lose roughly $237 billion to the charitable giving deduction from 2009 to 2013. In comparison, a study by the United Way found that a cap on charitable giving deductions could lead to a loss of $2.9 to $5.6 billion each year. The loss in tax revenues if the deduction is maintained is much greater than the potential loss to nonprofits if it is changed.
  • With the future of many of our nation’s grant-making agencies in question, siphoning off $237 billion from tax revenues could feasibly put an end to the government programs individuals and organizations have come to rely on.

    Senator Max Baucus (D-MN), chair of the Senate Committee on Finance, argues that charitable giving need not be motivated by cash incentives.

  • For the nonprofit sector, the real impact of a cap on charitable deductions is unknown. Research studies vary widely, as is often the case with studies about politicized issues. For example, the United Way published results of a poll that indicated “The vast majority of Americans (79%) believe reducing or eliminating the charitable tax deduction would have a negative impact on charities and the people they serve.” Yet the Indiana University Center on Philanthropy estimates that a cap on deductions would have little effect on overall charitable giving – a decrease of about 0.4 to 1.3 percent.
  • Some opponents of the deduction argue that high-end donors tend to make tax-deductible contributions to the arts and higher education. While many of us would counter with ample evidence that the arts and higher education are essential to society, there are some compelling examples of donors who abuse the deduction (discussed here).
  • The charitable giving deduction does not benefit all tax payers – only those who itemize their deductions. Paraphrasing Sen. Max Baucus (D-MN), Suzanne Perry of The Chronicle of Philanthropy writes: Most Americans now do not get any tax benefits for their donations because they don’t itemize their deductions and some charities get bigger subsidies than others because they attract more high-income donors, who get the biggest tax breaks.

Admittedly, eliminating the deduction would make my job harder. The charitable giving deduction is an invaluable resource in a fundraiser’s toolkit – so compelling, in fact, that many development professionals consciously use it to lure new donors. And I do not mean to make my field sound disingenuous – the deduction is seen as something of mutual benefit, a no-brainer for both nonprofits and their high-end donors.

But if I put my self-interest aside, I honestly feel rather torn about the debate. As my profession would suggest, I am a firm believer in the critical importance of nonprofits, and the role they play in improving our quality of life. That said, I also believe that government-funded programs are an essential safety net – not only for the American public, but also for nonprofit organizations.  The Department of Health and Human Services, the National Endowment for the Arts, the Department of Housing and Urban Development, the Institute of Museum and Library Services: these grant-making agencies have helped sustain thousands of worthy nonprofits for years. And, self-interest-wise, they have provided many opportunities for grant writers to earn a living.

Warren Buffet, billionaire and noted philanthropist, has said that a cap on deductions would not effect his charitable giving.

The necessity of these federal agencies has been called into question recently by conservative legislators, and those of us who work in the nonprofit sector have reacted with outrage. Yet we have reacted with similar outrage to the idea of eliminating the charitable giving deduction, a move which would generate new revenue to support grant-making agencies. Does one take away from the other? By providing large deductions to the nation’s wealthiest donors, are we condemning federal grant-making agencies to a slow death?

In the end, whether or not you choose to support the elimination of the charitable tax deduction comes down to a personal question: how much do you trust our government to spend our money wisely? Who do you feel will best look out for the interests of our communities – the government, or nonprofit organizations?

This is the conundrum I’m struggling with. I’m still not sure where I fall on the issue. I do believe in the importance of government grant-making and social programs, and in the need to address the budget deficit with new revenues. That said, as long as the defense budget accounts for a high percentage of American tax dollars, I’d rather see my wealthy neighbors’ money go to nonprofit organizations.

Can nonprofit professionals be true supporters of government grant-making agencies, and still call for the maintenance of the status quo regarding the charitable tax deduction?

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2 Responses

  • Susan R Geiger says:

    Enjoyed your discussion on the issue of charitable donations. I would love to discuss it further with you at Krissy’s on Sunday! I believe that Warren Buffet may not change his plan because he has more assests then most. Personally, we are finally at a point where we can start giving bigger contributions to non- profits. The tax write-off is nice but not that important. That’s just us. Some others may rely on that write-off. People don’t always pay attention to these types of government policies until its too late. What I’m afraid will happen is all of the “little people” who send in $20.00 or the like, will stop supporting non profits because there is no benefit for them. That’s a lot of help towards non-profits. I think the people with good hearts will continue to help. This is a great discussion. Thanks for posting it. i’m so proud of you and the woman you have grown to be. Your mom would be soooo proud!!

  • Lis Mirer says:

    I very much appreciate your thoughtful review. The number 1 and 2 reasons people cite for motivating a charitable donation is that they were one, asked by someone they know to donate, and two, the tax implications. My issue here is that threatening deductions threatens the safety net, which is already in bad shape. Most communities are grossly lacking in shelter beds, affordable housing, and other basic needs. Look at the charities listed in the graphic, they respond to emergency needs, the low income community, etc. There has to be a better way to generate revenue and not risk the safety net, so I am not for caps at least for now.

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