Charitable Deduction Isn’t ‘Loophole To Close’

October 15, 2012       John Graham IV      

In the middle of an acrimonious election season, policymakers in Washington, D.C., are faced with a looming “fiscal cliff” and the very real possibility that their delay in dealing with a number of fiscal policies is finally catching up with the country.

The facts are stark and can be universally agreed upon: With the growth in entitlement spending and a tax code that grows more complex every year, this country faces a major need to look at all fiscal policy to determine what is the best path forward for long-term, sustained economic growth. Regardless of what mix of “revenue enhancements” and spending cuts are used, a healthy nonprofit sector will be a critical component to these changes.

Disturbingly, it is during this time of uncertainty and need for the private sector that politicians of both parties are seriously considering plans that undermine the nonprofit sector’s ability to provide quasi-governmental services. Throughout the fiscal debates of the past few years, the idea of using the deduction for charitable contributions has been considered a potential “revenue raiser” by both parties, with both casually tossing the term about and ignoring the actual consequences of such a decision.

Members of Congress have discussed closing so-called tax loopholes for years, but to classify the charitable deduction as a loophole is disingenuous. First introduced into the tax code in 1917, Congress created the personal income tax deduction for the specific purpose of alleviating concerns about charitable giving at a time of changing tax policy. Progressives and charitable organizations were concerned the new income tax rates would discourage people from giving after-tax money to nonprofits, and thus saw the deduction as an incentive for people to donate while reducing the tax hit.

Conservatives, likewise, saw the deduction as “an efficient way to distribute public money to charities, as it cut out the government middlemen” (Joint Tax Committee testimony before the Senate Finance Committee, October 18, 2011). It is thus ironic that members of both parties see eliminating the deduction as a way to increase federal revenues and reduce government.

The same economic dynamics that are driving tax reform and the fiscal crisis are also driving the need for the preservation of the charitable deduction. According to Indiana University’s Center on Philanthropy, 65 percent of charities in their 2011 survey of the nonprofit landscape saw an increased need for their services while almost three in five surveyed charities saw their philanthropic support remain equal to or decrease from the same period in 2010.

The truth is charitable organizations are still recovering from the economic downturn and, with government dollars becoming more scarce, people are turning to the organizations they know and trust for help. But as citizens tighten their own finances, the nonprofit sector is forced to make do with fewer resources.

As an organization that primarily represents the 501(c)(6) community, ASAE views this problem from another perspective. Professional and trade associations classified as 501(c)(6)s will often have an affiliated 501(c)(3) foundation to help carry out the charitable or educational function of the association. The foundation will often provide scholarships for education, grants for innovative products, or training for a profession or industry that helps drive economic growth.

These associations are improving the workforce today and for the future and, like more recognizable charities, they rely on donations from individuals to operate. Their donor bases are members of the association, who in addition to membership dues and any purchases from the association, are then asked to support the foundation. For these donors, a deduction provides them an incentive to support their association’s mission beyond their current support.

Hopefully, donors would always support their favorite nonprofits regardless of the tax benefits. Some have argued that because of this the charitable deduction is irrelevant. While ideally this would be the case, the facts speak to the reality that economics do drive donor giving. The Joint Tax Committee testimony references multiple studies in the past three decades that show when the incentive for giving is adjusted negatively, the donated amount is likewise negatively adjusted.

As lawmakers peer over the fiscal cliff and debate how best not to fall off into the darkness below, they will be tempted to use tax deductions, especially the charitable deduction, as a quick fix to stave off economic disaster. Such a temptation must be resisted if government wants to continue relying on the nonprofit sector to partner with it in helping the population with many basic services.

A healthy nonprofit sector is critical to long-term economic growth and societal improvement, and without donors being incentivized to support their missions, nonprofits will be forced to make tough decisions and cut back on their core missions. Budget decisions being hailed as progressive and healthy would in reality be damaging long-term to the country. As such, lawmakers should stop discussing “loopholes” and take a hard look at the reality of what they are considering — potentially damaging the long-term viability of the nonprofit sector. In addition, it is time for all of us in the tax-exempt sector to band together and stand firm in the preservation of the charitable deduction. NPT

John H. Graham IV, CAE, is president and CEO of ASAE & The Center for Association Leadership in Washington, D.C.