Charities Need to Do More to Save the Charitable Deduction

Should the charitable income tax deduction be sacrosanct? Sen. Max Baucus (D-Mont.), chairman of the Senate Finance Committee, and Sen. Orrin Hatch (R-Utah), the committee’s ranking Republican, last year asked their colleagues to make the case for the deduction. Their goal was to make sure the nation has “a simpler, more efficient, and fairer tax code.” They said, “We believe it is important to start with a blank slate.”

This got the charitable community fired up, and we’ve heard a lot since about how the deduction is essential to augment America’s noble charitable character. The response from the Jewish Federations of North America, among the largest charities in the United States, captures the crux of the overall defense. “Donors’ contributions,” the organization wrote, “are the lifeblood of the Jewish Federation system and essential for us to fulfill our charitable mission. Proposals to limit the deductibility of charitable contributions would result in less giving and therefore cripple charities that strive to remain at the forefront of the fight to feed the hungry, clothe the naked and heal the sick.”

Heart-rending as the idea of saving the world is, however, the money needed to address it still has to come from somewhere. One donor’s deduction is the financial obligation of the rest of us. The Joint Committee on Taxation estimates that the benefit cost the national treasury more than $40 billion last year, and that it will cost more than $500 billion over the next ten years. In a world where every cost matters and the wealthiest donors and the wealthiest charities get the most of the deduction’s benefits, it is no wonder that there is a bipartisan urge to re-think the deduction.

But what the charitable community doesn’t seem to understand is that it is answering the wrong question by claiming that gifts would decrease. Although studies differ on this point, let’s take it on faith, for now, that contributions would suffer if the benefits of the deduction are reduced or eliminated. As many in Washington see it as just another expense item, the key question, even if Congress is inept at asking it, is whether society is getting at least what it’s paying for. That is, are charities improving our lives by $40 billion every year? In 2014, it is not enough to say they are feeding the hungry, clothing the naked and healing the sick. That banality, while sweet to the ear, is anathema to the budgeting process — and, even, to a serious examination of values. Add to that problem places that don’t seem much like charities — universities, for example, whose trustees are too often more worried about their investment returns than ensuring a good education — and the growing number of examples of fraud or wrongdoing, and anyone can easily understand the question: Why subsidize rich organizations and bad behavior? Charities that defensively circle the wagons and project less revenue without addressing what the revenue pays for are seriously missing out on the real issue of the day.

Even though an argument can be made that, on balance, our patchwork system of nonprofits is healthy, charities have an obligation to actually demonstrate and quantify what they do for the rest of us. They may be aware of a growing interest in their effectiveness, but that interest is countered all too often with platitudes. Alone, responses like “feeding the poor” and “educating the deserving” no longer cut it.

That might sound harsh, but the world we live in deserves no less.  Knowing that a charity fed or sheltered a specific number of people last night is a good thing – although we don’t get enough of even that kind of basic data – but we need to also ask what the point is if those people are not also being helped in ways that would elevate them to more productive levels. That scholarship money is being spent on deserving youth is good, but what good do former students perform in the decades after graduation day? The answers can and should be pluralistic – no judgments as to what are better deeds than others – but, if we’re debating the importance of the charitable deduction, we must start talking about values and not just the amount of donated dollars.

Keep the anecdotes coming. They pull at all our heartstrings, and charities are, at their core, our heartstrings to a better society. But the feel-good nature of our involvement – and we are all involved – needs to be augmented with demonstrable effectiveness. Only then will the deduction be sacrosanct.