Much discussion ensued following President Obama’s proposal to cap the charitable deduction for high income individuals. While that proposal was not enacted into law, the mention of change to a nearly 100 year old taxation policy generated much consternation in the nonprofit community. Regardless of one’s political position, the question surrounding the charitable deduction remains: what value does the charitable tax deduction create in the donor’s decision to make a gift?
Donor surveys consistently and overwhelmingly state the primary reasons for a gift include a passionate belief in the charity’s mission and work, trust in the solicitor, personal experience with the charity as a service recipient, volunteer or board member, and a conviction that the charity’s work is vital to the community. The federal tax deduction has never risen higher than 6th place in any survey I have seen in my 20-year philanthropy career. Yet I submit it can spur giving, especially at the end of the year.
Let’s be honest – Americans are notorious procrastinators. We wait until April 15 to file taxes and we have to be shamed, goaded, even cajoled into seeing a physician (applies to us men!), just two examples. When you look at the size of charitable giving in the US for 2014, it has eclipsed the pre-recession mark – $358 BILLION! (Giving USA study published in 2015) Put the level another way, this amount would be the 34th largest economy in the world, ahead of countries like Denmark, Singapore, Israel, and Finland (World Bank Development Indicators database). Americans are without a doubt the most generous people in the world!
Going back to the posed question, what value does the charitable tax deduction create in the gifting decision? It certainly has not boosted the overall level of giving as a percentage of the US Gross Domestic Product (GDP), which has held steady at 2% for the past 40 years (Giving USA study). However, when you look at a possible cap on charitable deductions, I submit it would deter or limit the amount given to US charities, especially transformational gifts that charities use to create solutions the government is likely ill-equipped to duplicate. And certainly not as efficiently as charities.
Those who itemize their tax returns have historically accounted for anywhere between 65-75% of all individual gifts to charities. Any proposal that could jeopardize that level of giving would be detrimental to our society at a time when charitable services are needed more than ever. The charitable tax deduction is a truly unique benefit as it does not provide a direct benefit to the itemizer, unlike the mortgage or property tax deduction.
One idea circulating in the Washington think-tank world is to change the current deduction to a tax credit with a floor on income. Essentially, individuals would receive a tax credit, which is more beneficial than a deduction, on charitable gifts made above a percentage of income. For example, an individual with an Adjusted Gross Income of $100,000 would receive a graduated tax credit, say 25% on gifts over and above a 2% floor – $2,000 in this example. A taxpayer giving $10,000 would receive a $2,000 tax credit ($10,000 in gifts less the $2,000 floor equals $8,000 at a 25% rate would yield a credit of $2,000) How would that play in the nonprofit sector? I frankly do not know. Change is always difficult and changing the tax code is rarely pleasant. How could the effects be predicted? No precedent exists about altering the charitable tax deduction.
As we face the 2016 election season, is it possible for our country to have a rational discussion about how we wish to incentivize charitable giving? I intend to ask candidates their positions on charitable incentives through the tax code. I hope you do as well. Enjoy the Labor Day holiday!