Ask The Experts: What Should We Do with the Charitable Giving Tax Deduction?

Experts Discuss Changes To Charitable Giving Tax Deduction

Just picture all of the starving children and imprisoned puppies.  That’s exactly what opponents of proposed changes to the 96-year-old charitable giving tax exemption want public opinion to center on.  But those who do support some sort of fundamental change will counter with images of a bedraggled, homeless Uncle Sam begging for food money on a street corner somewhere.  The question is, who’s right?

It’s hard to decipher right from wrong when you’re ostensibly choosing between the lifeblood of philanthropy and the federal government’s long-term financial security, especially since both sides will quote their fair share of supporting research.  Further complicating matters is the notion that this needn’t really be a disparate, cause-and-effect type of decision.  In other words, changing the way people approach charitable giving with tax implications in mind isn’t the only way to skin the budget cat.

What this all really boils down to is the fact that the government desperately needs money to close our $759 billion budget deficit, reduce the ever-growing $17 trillion national debt, and calm market concerns over an uncertain economic outlook.  It is with these things in mind that the Obama administration has been trying since 2009 to replace the existing federal subsidy on charitable donations (which is currently capped at 39.6% for people in the highest tax bracket) with a 28% cap.  By limiting charitable deductions to 28 cents on the dollar, experts believe the government would essentially bolster its annual revenues with $5 – $9 billion that would have originally gone to charities.

While that would only represent a drop in the bucket compared to what we truly need to solve our fiscal woes, it’s not the only plan on the table.  Others have proposed replacing the charitable tax deduction with a refundable tax credit in order to reduce the current bias toward wealthy individuals who itemize their deductions (currently the only way you can take advantage of this incentive).  Still others support doing away with the distinction between itemizers and non-itemizers as far as charitable giving is concerned or capping all itemized deductions at a certain dollar amount.

Each of these proposed plans has its own merits and drawbacks, but before you cast your lot with any one of them, there are a few things that bear mentioning.

  • Only one-third of all households itemize their deductions each year.  But that includes nearly 40 million Americans who claim the charitable giving tax deduction.
  • Out of the roughly $39 billion in charitable deductions taken each year, $33 billion (or about 85%) goes to the wealthiest 20% of households, according to the Congressional Budget Office.  The top 1% of earners also reaps more benefit than any other cohort.
  • People give more money to religious groups like churches and synagogues than any of the other organizations that are eligible for deductible donations, according to Giving USA reports.
  • In 2011, Hawaii instituted a cap on itemized deductions, resulting in only 117 fewer people claiming charitable deductions compared to the year before, according to the Pacific Business News.
  • During recent Congressional testimony, Brian Gallagher – president and CEO of United Way – said that a 28% cap on charitable deductions would reduce donations to the organization by $100 million each year.

Armed with that background, it’s probably a good idea to also consider what leading experts on tax policy and non-profit organizations have to say about potential changes to the charitable giving tax deduction before you make up your mind on the matter.  CardHub turned to a few of these folks for ideas on how the government can/should/will handle this issue, and you can check out what they had to say below.

Expert Opinions

  • Will Changes be Made to the Charitable Giving Tax Deduction?
  • How Would Changes to the Charitable Giving Tax Deduction Affect Individuals, Government, and Nonprofit Organizations?
  • How WILL This Situation Ultimately Play Out?
  • How Would YOU Alter the Tax Code as It Relates to Charitable Giving?
  • There has been a lot of talk lately about altering the charitable giving tax exemption for individuals – what, if anything, will eventually come of this?
  • How would a cap on deductible donations or a move to a refundable credit affect individuals, government, and nonprofit organizations?
  • Could the problem (if there is one) be instead with how tax-exempt organizations are classified? For instance, there are more than 1 million tax-exempt organizations in the U.S., including giants like the NFL.
  • If it were up to you, how would you alter the tax code as it relates to charitable giving and tax-exempt organizations?

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Calvin H. Johnson

Andrews & Kurth Centennial Professor of Law, The University of Texas School of Law

There has been a lot of talk lately about altering the charitable giving tax exemption for individuals - what, if anything, will eventually come of this?

Ain’t Charity” argues that we need to limit the charitable deduction to cost (less depreciation). Value above that is already excluded, and should not be excluded twice. The deduction is to take out amounts that are already in the tax base, like salary, not to double take out that which is already excluded from the tax base. “Ain’t Charity” also argues that we need a floor of $1000 if TP attended the religious service or show. That is consumption, not a gift to others.

How would a cap on deductible donations or a move to a refundable credit affect individuals, government, and nonprofit organizations?

I would now add a floor of 10% of adjusted gross income for charitable costs to take away deductions for ordinary living costs. The tax system should not have provisions in it that are not worth auditing, record keeping, and penalties. Only the big ones, worth enforcing. “Honor Bonds” was a synonym for don’t bother to pay tax on them. If we are not willing to impose the strong arm of the law, then don’t put it in the law.

If it were up to you, how would you alter the tax code as it relates to charitable giving and tax-exempt organizations?

NFL is just a partnership of teams: the exemption is not because it is charity, but because it is just a partnership or pool. I think we need to take away their exemption for investment income on the NFL level, but I don’t know that that is a big issue.
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Michael J. Graetz

Columbia Alumni Professor of Tax Law, Columbia University

There has been a lot of talk lately about altering the charitable giving tax exemption for individuals - what, if anything, will eventually come of this?

Perhaps some limitations for individuals and maybe even denial of deductions for charitable gifts of corporations. But maybe nothing at all.

How would a cap on deductible donations or a move to a refundable credit affect individuals, government, and nonprofit organizations?

A cap or a shift to a credit -- at the same cost in revenues as the existing deduction -- would reduce charitable giving by high income individuals and perhaps increase such giving a bit by lower and middle income individuals, but the latter is speculative. There would be a loss of gifts for the favored charities of high income individuals: universities, private k-12 schools, arts and cultural organizations, and hospitals. If giving by moderate income individuals increased, this would benefit organizations like the Red Cross, the United Way, the Girl and Boy Scouts, and churches, but, as I said, any such increase is speculative.

Could the problem (if there is one) be instead with how tax-exempt organizations are classified? For instance, there are more than 1 million tax-exempt organizations in the U.S., including giants like the NFL.

Many of the tax-exempt organizations are exempt from tax on their investment income, but are not eligible for deductible contributions. Some pruning could be done in both categories, but there has never yet been a successful effort to define "charity." Regulatory requirements apply to private foundations. The best that has been done is to say what they cannot do, such as too much political activity, and, as recent controversies make clear, these rules should be revisited.

If it were up to you, how would you alter the tax code as it relates to charitable giving and tax-exempt organizations?

That question is too big for an email, but I think a floor on deductible contributions, say 2% of income, so that only contributions in excess of that amount would be deductible, would not do any harm and could raise revenue to lower rates, for example. The rules about what qualifies for tax exemption should be revisited -- business leagues, cemetery organizations, and labor unions, for example, could all disappear in my view. And the regulatory structure, including required disclosures, needs re-examination.
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Harvey Dale

Professor at the New York University School of Law & Director of the National Center on Philanthropy and the Law

Will Changes be Made to the Charitable Giving Tax Deduction?

It would surprise me that in the fullness of time there were no changes made to income tax deduction, but I don’t think anything substantial is going to happen very soon for a couple of reasons. First of all, the legislation typically begins in the House – in the House Ways & Means Committee – and the head of that committee, Congressman Camp, said that he was in favor of the charitable contribution deduction and didn’t want to modify it. The other reason is it’s going to be very hard to get anything sensible done through Congress given the polarization and paralysis that’s evident there. So, I would not think in the short run that there’s going to be any major change.
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Jon Bakija

Professor of Economics at Williams College

How Would Changes to the Charitable Giving Tax Deduction Affect Individuals, Government, and Nonprofit Organizations?

It depends on how the policy is designed, and on the responsiveness of donation behavior of different types of people to tax incentives for charitable donations. My own research looks at evidence on the latter. Economists define the ‘price’ of donating $1 to charity as $1 minus the tax savings from making the donation. So, for example, for someone who itemizes deductions and who is in the top federal income tax bracket (with a rate of 39.6%), and who does not pay state income tax or face other complications, the price of giving another dollar to charity is 1-0.396 = $0.604, or in other words about a 40% reduction in price relative to what would happen without the charitable deduction.

In my research with Brad Heim of Indiana University, we exploited the fact that the price of donations went up a lot more over time in some states than in others, because of state tax policies and their interactions with federal tax policies. We found that donations went down relatively more over time for people living in states where the price of donations went up relatively more over time, compared to similar people in other states where the price did not change so much. Based on that, we estimated that a 1% increase in price is associated with a decline in donations of a bit more than 1%. This is corroborated by the fact that since the 1970s, tax incentives for donations in the U.S. declined relatively more for high-income people than for others, and donations as a share of disposable income also declined relatively more over time for high-income people than for others.

Assuming a degree of responsiveness to incentives roughly consistent with the evidence I cited above, Joe Cordes of George Washington University recently estimated that a proposal to cap all itemized deductions at 2% of income would reduce charitable donations made by households in the U.S. 19.8%, or more than $40 billion per year, while only reducing the tax revenue cost of the charitable deduction by only $4.6 billion. Capping charitable deductions is a particularly bad policy because it hurts the incentive to donate a lot while generating relatively little revenue. For anyone with deductions above the cap, the policy would convert the tax incentive for donations into a windfall for donations that would have been made anyway, while eliminating the incentive to donate more at the margin. A better approach would be to allow deductions for charitable donations that exceed, say, one or 2% of income.

Assuming a similar degree of responsiveness to tax incentives for giving, Joe Rosenberg of the Urban Institute, estimates that the Simpson-

Bowles budget plan proposal to replace the charitable deduction with a non-refundable credit that reduces tax liability by an amount equal to 12% of donations in excess of 2% of AGI would reduce aggregate household charitable contributions by 12%, or about $24 billion per year, and would increase annual tax revenue by $29 billion. This is relative to a baseline with a top federal marginal income tax rate of 35%, so both effects would be somewhat larger if the policy were compared to 2013 law, with its higher top tax rate. Compared to that, if the credit were made refundable, the revenue gain from the reform would be smaller, but it would improve the incentive to donate to charity among more low-income people. My own research suggests that high-income people are probably relatively more responsive to tax incentives for giving than are middle-income people, but there is little credible evidence to go on with regards to low-income people since they have rarely benefited from tax incentives for charitable donations.

How WILL This Situation Ultimately Play Out?

The charitable deduction appears to be popular. In an April 2011 Gallup poll, more than two-thirds of respondents opposed eliminating the charitable deduction. And given the political gridlock right now, the odds of any major reforms happening very soon are probably low. But over the coming years, I would guess that predictions of large and growing government budget deficits in the decades to come are likely to intensify pressure to cut back on many popular policy provisions, including the charitable deduction.

How Would YOU Alter the Tax Code as It Relates to Charitable Giving?

I’m in the business of trying to objectively assess the evidence rather than advocacy. If you think the non-profit sector is doing some important good, then you should probably oppose policies that cap charitable deductions, which reduce incentives to donate a lot without raising much revenue, because the evidence suggests reducing tax incentives for giving is going to have an important impact. Only allowing deductions for donations in excess of a certain percentage of income would be a way to raise a given amount of revenue with less harm to the incentive to donate. Replacing the deduction with a credit would make the tax incentive to donate more uniform across people at different income levels, which has some appeal, but it will reduce aggregate donations unless you set the credit rate at a relatively high rate (much higher than the 12% rate discussed above), in which case the reform wouldn’t raise much revenue. Switching to credit in a way that increases tax revenue will reduce aggregate donations relatively more if high-income people are relatively more responsive to tax incentives for donations than are middle-income people, and my research suggests that is probably the case, so that is something to take into account as well.
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Ray Madoff

Professor at Boston College Law School

How Would Changes to the Charitable Giving Tax Deduction Affect Individuals, Government, and Nonprofit Organizations?

I think a cap is the wrong way to go because wealthy people are in the best position to give charitable dollars. A cap could have the effect of setting that amount as a norm and could therefore reduce charitable giving.

It would be better to adjust the charitable deduction in other ways: setting a floor and reducing the benefit given to gifts of appreciated property would be two ways to make the deduction fairer.

How WILL This Situation Ultimately Play Out?

I suspect that nothing will come of this because the lobbying arm for the charitable sector is very strong. They have adopted the phrase — ‘the charitable deduction is a lifeline not a loophole’ — and I think that has been an effective marketing strategy.

How Would YOU Alter the Tax Code as It Relates to Charitable Giving?

I would revise the charitable deduction so that it paid closer attention to when money which has received the charitable deduction will actually be used to fulfill charitable purposes. Too many private foundations and donor advised funds are serving as charitable holding pens whereby they hold funds indefinitely. This does nothing to serve the public nor fuel the economy.
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John Eason

Professor at the Seattle University School of Law

How Would Changes to the Charitable Giving Tax Deduction Affect Individuals, Government, and Nonprofit Organizations?

Obama proposes capping the value of the contribution deductions to that enjoyed by a taxpayer with a 28% marginal tax rate. In other words, a taxpayer in the 39.6% tax rate bracket who gives $10,000 to charity would see her deduction—effectively a government ‘subsidy’ to the taxpayer’s preferred charity — reduced from $3,960 (current law) to $2,800. Assuming no drop in the overall level of giving, Obama’s proposal has the dual advantages of increasing revenue by limiting the tax break, while also addressing an equity concern under the current regime. If the overall level of charitable donations drops, however, the change could mean less tax revenue for Uncle Sam and lower donor-based revenue for charities — both negative outcomes that do not really promote any policy or other goal.

Obama’s tax rate percentage cap should be distinguished from proposals that seek to impose an absolute dollar cap on the amount of annual contributions that can be deducted by any one taxpayer. I think this would be a bad idea. While the correlation is imprecise, logic and several studies suggest that a deduction cap would negatively impact charitable giving, and in particular, reduce large gifts made to charities by wealthier taxpayers. And an absolute dollar cap would likely have a greater negative impact than would simply capping the rate at which the deduction applies at 28%, as Obama proposes. To the extent either proposal results in a drop in overall charitable giving, that outcome is inconsistent with the view that the charitable contribution deduction is a subsidy of sorts, designed to encourage individuals, rather than the government, to direct funds to charitable concerns of the individuals’ choosing. This promotes a more pluralistic society and reduces the risk of government inefficiency that would result were government to deny any deduction at all and instead provide the charitable service itself, through direct expenditure of the collected tax dollars. And the rationale for the subsidy resonates even more strongly when you consider that many organizations use charitable donations to address issues that, in the absence of charity, the government itself would confront.

Two facets of the debate weigh against any quick and obvious solution, however. First, the problem with identifying a particular proposal as ‘best’ depends, to some degree, on your view of why we have the charitable deduction in the first place—the subsidy rationale is not the only viable explanation. Second, any ‘solution’ that negatively impacts charitable giving is likely to be disfavored, both for political reasons and because fundamentally, encouraging gifts to charity per the subsidy rationale must be part of any explanation for the deduction’s history in our tax law.

How WILL This Situation Ultimately Play Out?

Tax exemption for charities and the charitable contribution tax deduction have evolved from a two sentence tax code provision enacted in 1917, to the multi-page, incredibly complex set of current rules that govern today. On the first day of a semester teaching income tax to law students, I introduce both the complexity and non-tax goals that Congress weaves into a tax code that at a most basic level exists to raise revenue. A prime example is the charitable contribution deduction. After considering some of the dynamics that affect charitable contributions and our attitude towards them, I have students skim the current, quite lengthy and complex, charitable contribution deduction provisions of the tax code. The level of complexity ‘needed’ to implement such a seemingly straightforward policy objective consistently amazes and baffles students on their first day of class. We discover, for example, different levels of favoritism for gifts to different types of donees (e.g., public charities vs. private foundations), different types of gifts (e.g., cash vs. appreciated property), and so on—all flowing from Congress’s seemingly perpetual tweaking of how the charitable contribution deduction operates. These changes often occur because of some abuse that Congress has recently fixated upon, such as the private foundation abuses that led to stringent foundation rules in the late 1960’s, to substantiation requirements that have gained ever-increasing traction over the last few decades (e.g., the written confirmation taxpayers must now obtain from the charity for any gift valued at over $250). One simple conclusion is that the more non-tax policies Congress pursues via the tax code, the more complex and susceptible to taxpayer abuse the tax code becomes.

Although historically you can pick a decade and find various Congressional hearings and enactments related to the deduction—and particularly to taxpayer abuses of the deduction—I believe we are in the midst of a more comprehensive discussion about how the deduction operates, its revenue impact, and how both factors affect taxpayers at various levels of income. I don’t expect any drastic departure from the notion that giving to charity results in a tax deduction, and in particular, the notion that the more you give, the larger the tax benefit. But the rationale and nuances surrounding implementation of those ideas are clearly on the table. I think the current revenue/debt situation brings to the forefront the dollar impact of pursuing non-revenue objectives under our tax statutes. Encouraging charitable contributions, home ownership, and retirement savings are just a few examples. As with many other deductions, the largest tax breaks generally go to higher income individuals, because the higher a taxpayer’s marginal tax rate is, the more a deduction is worth to that taxpayer. So in addition to looking at revenue impacts, we are giving more attention to some of the equity issues inherent in the current structure of deductions like that granted for charitable contributions.

How Would YOU Alter the Tax Code as It Relates to Charitable Giving?

If change occurs, I think two related reforms make the most sense. First, there is much support for the idea that all taxpayers should be allowed a deduction for charitable contributions, whether or not they itemize deductions. Approximately one-third of taxpayers currently itemize deductions—which means that more than two-thirds of taxpayers currently receive no tax benefit at all for their charitable contributions. So expanding the availability of the deduction would lessen the disparate tax treatment of wealthier taxpayers—who typically itemize—and lower income taxpayers—who typically take only the standard deduction. This should encourage more charitable giving, particularly from those formerly denied any deduction because they did not itemize. On the other hand, simply expanding the availability of the deduction would likely be a revenue-looser, which in isolation is likely a non-starter in the current environment.

Whether the availability of the deduction is expanded to all taxpayers or not, I favor the imposition of a floor (rather than a cap) on the amount of annual contributions that a taxpayer can deduct. While it adds a bit of complexity, it is not unfamiliar complexity—we see the floor concept already with medical expenses, casualty losses, and other ‘miscellaneous’ itemized deductions. By way of example, assume Congress imposes a ‘floor’ of 2% of AGI on the deductibility of charitable contributions. This basically means that the taxpayer gets a deduction only for the amount given in one year that exceeds 2% of the taxpayer’s AGI. A taxpayer with $100,000 AGI who gives $10,000 to charity, for example, would be able deduct only $8,000—i.e., that portion of the contribution that exceeds $2,000 (2% of $100,000 AGI—in sum, $10,000 contribution less $2,000 floor = $8,000 deductible gift = $2,000 of potential additional tax revenue). Since the floor is tied to AGI and thus eliminates greater dollar amounts from the deduction calculation as income rises, lower income taxpayers and higher income taxpayers are treated similarly, at least relative to their respective incomes. That would be progress in terms of achieving more equity in the charitable contribution deduction scheme. It would also likely have little impact on wealthier taxpayers who make contributions far in excess of 2% (in this example) of their AGI. In contrast to some type of cap, a floor might actually encourage more charitable giving, because once the floor is exceeded, every additional dollar given would be deductible at the taxpayer’s marginal tax rate (or at least, 28% under Obama’s proposal). In other words, the more a taxpayer gives in one year, the lower would the impact of the floor on their total deduction, since the floor eliminates a deduction only for the first dollars given up to 2% of AGI.

The other benefit of using a floor is that it reduces the administrative burden of policing smaller gifts by rendering irrelevant (from the IRS’s point of view) aggregate annual gifts that for a particular taxpayer fall below 2% of AGI. Under the tax code as it currently stands, a taxpayer who itemizes and gives $500 to charity, for example, will deduct that $500, which must be substantiated in writing (a burden on the charity and taxpayer). The substantiation rules are quite complex, reflecting Congress’s concern that abuses do occur here. Under a floor proposal, however, only ‘meaningful’ gifts, at whatever percentage floor we settle upon, merit deduction. So our $500 total annual gifts in the above example would simply be an altruistic gift, with no tax impact, cost, or policing concern, since $500 in total annual charitable contributions would fall below the floor and thus be irrelevant from a tax reporting and administrative standpoint.

Plenty of other areas could stand attention by Congress. One smaller change that I would make would be to eliminate the deduction for clothing and household items given to charity. There is simply too much documented abuse here by taxpayer’s who give Aunt Fanny’s 1970’s wardrobe to Goodwill and then claim that the clothes were worth hundreds or thousands of dollars in excess of reality. Congress should also more closely examine the types of gifts and the types of donees that truly merit a tax deduction This would render the subsidy (if you believe that is what the contribution deduction is) more directly effective at supporting those types of organizations that we think truly ‘do good’ for society. For example, Congress might make changes that reflect the fact that a cash gift directed at relieving poverty (the fundamental definition of ‘charity’), is infinitely more valuable to society than is a donor’s gift of, say, a conservation easement to the golf course adjacent to her home. Simplifying the types of eligible donees would also eliminate some of the complexity inherent in the current scheme as well, since, in this example, cash has an obvious value whereas the conservation easement would require appraisals and potentially result in a costly valuation dispute—assuming that the IRS has the wherewithal to discover and challenge any overvaluation.

Finally, I think that the problem of excessive political activities by 501(c)(4) organizations—both independently and in association with related c3 charitable affiliates—merits significant attention. Though c4’s are not charities, they are tax-exempt and it is not uncommon for a c3 charity to operate in association with a politically active, closely affiliated c4. Currently, the bulk of c4 limitations on such political activities are found in the tax code. Significantly, c4’s can engage in political activities without disclosing the names of donors. That is a big reason why c4’s are now the favored political form utilized to pursue ‘Swiftboat’ and similar types of campaigning. So long as the c4 organization simply communicates a message without identifying a particular candidate, such an effort is unlikely to run afoul of the current rules. The anonymity—of both the supported candidate and those funding the message—fosters the negativity and half-truths that big money donors can inject into our political system. In light of the unlimited sums allowed under the Supreme Court’s 2010 Citizens United decision, issues arise here that transcend tax law, but thrive in large part because of the tax rules.
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Miranda Fleischer

Professor at University of San Diego School of Law

How WILL This Situation Ultimately Play Out?

If anything happens, I would bet it would be the 28% cap, but I think the events of the past couple months have stalled that ship. If it happens, I just saw a study suggesting giving would drop $8-9 billion, but the government would save $10B.

Another idea that could happen in the future would be replacing the deduction with a 15% credit or a 25% credit (the 2005 Bush tax panel proposed this). I just saw a study where a 15% credit would save the government $9-10 billion a year while only dropping giving $6-10 billion.
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Elaine Wilson

Associate Professor at the West Virginia University College of Law

How Would Changes to the Charitable Giving Tax Deduction Affect Individuals, Government, and Nonprofit Organizations?

Two of the options floated for change are the cap on donations or the refundable credit. The cap has taken many forms – a cap on the absolute amount of the charitable deduction, a cap on the percentage reduction in AGI that you can get from the deduction, and a cap on all itemized deductions, of which the charitable deduction is just one (the other itemized deductions include the home interest deduction, medical expense deduction, state and local tax deduction, and casualty loss deductions). I tend to think that if we were to see one of these, we would see the limit on itemized deductions as a whole – it’s politically palatable to place a cap on all of them without having to go pick and choose among a host of popular deductions. As a practical matter, however, I think the charitable deduction loses out in this scenario, as in any of the others. If you think about it, most of those itemized deductions are not especially voluntary – you pay your state and local taxes, your mortgage deduction is what it is (maybe you adjust next time you buy a house, but for now, it’s a fixed number), and if you are deducting medical expenses or casualty losses, you have bigger issues. The charitable deduction is the only deduction that is controllable through a direct choice of the taxpayer. If a taxpayer’s decision to make a charitable deduction is driven only by tax benefits, then he or she will simply make that amount of a contribution that generates a deduction equal to the difference between his or her ‘fixed’ itemized deductions and the cap. If there is no room under the cap, that taxpayer would not make any further contributions.

Life is not that simple, however, in that donors are rarely exclusively incentivized to make contributions by the tax benefits. It is often a factor in the amount, timing, or structure of the contribution, but the deduction often isn’t the driver of the decision. The vast majority of Americans don’t even itemize their deductions on the Schedule A, so their giving is not motivated at all by the tax aspects of the contribution. For those that do itemize, again, my experience is that only the extremely wealthy take the tax deduction into account when giving. Most people do not have their calculators in hand when writing a $500 check to their church or the local food pantry. Among the very wealthy, the BofA study found that ‘less than one third (32%) of wealthy donors cited tax advantages among their chief motivators for giving in 2011. In fact, half (50%) reported that they would maintain their current charitable giving levels even if income tax deductions for donations were eliminated.’

The problem for nonprofits is that many are sustained by the larger gifts – according to the BofA [study], typically religious, educational and health care charities – and at least some of these large gifts are partially tax motivated. I would guess that capital campaigns for buildings and endowment-type gifts also benefit from larger gifts. The conventional wisdom is that a cap on the deduction would likely hit these larger gifts and end up in a reduction in overall giving to charitable organizations, which would result in a reduction in services.

On the government side, I suspect that you would see fewer deductions and therefore, more revenue. That being said, who knows whether the indirect cost of the reduction of services from nonprofit organizations would end up being funded somehow by government, or if we are just willing to live with a reduction in service.

I’m not exactly sure how the refundable credit would play out – it would depend upon the structure. If it is available to all – itemizers and non-itemizers alike – then it would expand the world of taxpayers that could get a tax benefit from charitable giving. However, I’m not sure that translates to more giving, as non-itemizers already make gifts that they can’t deduct and, if they tend to be lower-income taxpayers, they simply may not have the capacity to do much more. It would, however, be a significant cost to the government without the incentivizing effect, which doesn’t seem like a very good deal. As always, the devil will be in the details.

How WILL This Situation Ultimately Play Out?

To a great degree, I think that any changes to the charitable deduction are linked to the fate of comprehensive tax reform. The charitable deduction is popular enough (and the optics of limiting it are bad enough) that I can’t see Congress touching the charitable deduction in the absence of comprehensive tax reform. Personally, I’m not optimistic that we will see comprehensive tax reform (meaning fundamental changes to the structure of the tax code, as opposed to changes around the edges of different provisions – even if there are many such changes), as it would take a degree of bi-partisanship that does appear to exist in Washington, D.C. at the moment.

To the extent that we do see changes to the charitable deduction as part of a tax package, my prediction would be that there would be two types of changes: (1) technical changes to Section 170 that are aimed at compliance/abuse issues, but no fundamental change in how it works, and (2) changes to the overall structure of itemized deductions, which would have an impact on the Section 170 deduction indirectly (more on this next question).

The discussion that needs to happen – as indicated in the Senate Finance piece – is why are we making these changes? Do we think that the role of the Internal Revenue Code is to incentivize/encourage charitable giving? Are we trying to benefit the charities that receive the contributions, or are we trying to more accurately reflect the income of the taxpayer making the contribution? Are we just looking for more revenue and policy be damned? The ultimate content of any change should be dictated by the answer to these questions, but I don’t know that there is any consensus on the answer (or even the questions!).

How Would YOU Alter the Tax Code as It Relates to Charitable Giving?

As it relates to charitable giving, it’s a difficult call. As a tax policy matter, I have my doubts about whether we should ever use the tax code to incentivize individual behavior (business, charitable or otherwise). It seems to me that it skews economic decision making, it is not especially transparent, it is complex and therefore difficult to implement for the individual taxpayer, and it adds to overall complexity of the tax code. Therefore, to the extent we would have a charitable deduction, it would merely be a measure of income that the taxpayer no longer has and received no benefit for, and not an incentive for further charitable giving.

I lost that fight in 1954, I think, so I’d like to see Section 170 revised in some areas to avoid abuse (for example, the conservation easement rules) while making it easier for the average taxpayer and charity to apply (for example, the substantiation rules cause a good deal of headache but I’m not sure they actually result in better tax compliance). I do not think that the cap on the deduction is a good idea because of its effect on charities and I would want direct charitable gifts to be an exception from any limit on Section 170 deductions (as this is income foregone for which the taxpayer received no benefit in return).
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James Ferris

Director of the Center on Philanthropy and Public Policy at the University of Southern California

How Would Changes to the Charitable Giving Tax Deduction Affect Individuals, Government, and Nonprofit Organizations?

A cap on deductions would limit the tax advantage and thus depress giving depending on how sensitive giving is to the marginal tax rate. There are a couple of recent reports that estimate the impact. The greatest impact will be felt by institutions that benefit from those who itemize…larger nonprofits such as hospitals, universities, museums, etc.

The refundable credit…is an attempt to increase access to a tax advantage among those who do itemize. [It] would help smaller to mid-sized nonprofits most likely. Of course, the devil is in the details.

How WILL This Situation Ultimately Play Out?

The window for some action related to the charitable contribution deduction is if and when there is an effort for fundamental tax reform. This might happen in the context of larger fiscal/budgetary debates. It is unlikely to happen otherwise.

The issue of the tax exemption of nonprofits is another matter. It may get tweaked, especially in the case of 501 c 4 organizations in light of the investigations/reviews now underway.

Of course, only gifts to 501(c)(3) organizations are deductible for individuals who itemize. So they are separate issues.

How Would YOU Alter the Tax Code as It Relates to Charitable Giving?

I think it is important to continue to continue the deduction. There are an number of approaches that can sharpen the incentives.
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Sarah Waldeck

Professor at Seton Hall Law

How Would Changes to the Charitable Giving Tax Deduction Affect Individuals, Government, and Nonprofit Organizations?

I’m not sure. But it would be interesting to see. People give gifts for lots of reasons — because they genuinely care about an organization and its mission, because they want to signal to friends and peers that they are generous, and so forth. The charitable giving tax exemption is one reason people give, but just one. And, of course, many people don’t even bother to keep track of or itemize smaller gifts. For these people or for smaller gifts, eliminating the exemption would make no difference at all.

How WILL This Situation Ultimately Play Out?

Again, I’m not sure. However, the charitable sector has tremendous lobbying power, even though we tend to think of charities as discrete entities. I have often thought that changing the charitable giving tax exemption is as difficult as getting rid of the home mortgage interest deduction.
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Charles Irish

Volkman-Bascom Professor of Law Emeritus, University of Wisconsin Law School

There has been a lot of talk lately about altering the charitable giving tax exemption for individuals – what, if anything, will eventually come of this?

You need to be aware of the enormous political consequences underpinning the charitable contribution deduction. First, the US charitable contribution deduction is, in my experience, the most generous in the all the rich countries in the world, but that partly reflects the American political philosophy of limited government and leaving the private sector to pick up the gaps in government services. This is not a new idea being put forward by conservatives today, but it goes back at least to the Robber Barons of the late 19th Century and perhaps to the founding of our country. If you look at the charitable contribution deduction (and the treatment of NGOs generally) in countries with more interventionist governments, such as the Scandinavian countries, you find much less generosity in the treatment of charitable contributions and NGOs, but that is largely a reflection of NGOs as being in competition with government.

A second political aspect of the charitable contribution deduction follows from who gives to what institutions. Gifts by lower income individuals tend to go disproportionately to churches and other religious organizations, while higher income individuals favor education, arts, and health care. So, if you move to credit instead of a charitable contribution deduction, the move is likely to stimulate giving by lower income individuals, which will favor churches and other religious organizations and which is precisely why the Tea Partiers might support it.

If the Republicans make significant gains in the Senate and hold onto the House in the midterm elections, I expect some changes in the charitable contribution deduction, including the possibility of a credit in lieu of a deduction.

How would a cap on deductible donations or a move to a refundable credit affect individuals, government, and nonprofit organizations?

There already are limits on charitable contributions deductions so I assume you mean more stringent caps than currently exist. The major effect would be to cut down on contributions by high individuals, which would hurt their beneficiaries.

Could the problem (if there is one) be instead with how tax-exempt organizations are classified? For instance, there are more than 1 million tax-exempt organizations in the U.S., including giants like the NFL.

A lot of people do not understand that the non-profit world is exceptionally profitable. Nick Saban, the University of Alabama’s football coach, now makes $7 million a year and the top two earners in the NFL make over $10 million a year. You can check out the salaries of the large foundations, the managers of Yale and Harvard’s endowments, and quite a few college presidents to see how profitable this sector is.

Note, however, that the NFL, the NBA, the ABA, the AMA, and similar organizations are not tax exempt charities, while Alabama, Yale and Harvard are.

If it were up to you, how would you alter the tax code as it relates to charitable giving and tax-exempt organizations?

First, I’d tax all non-profit organizations on their investment earnings, minus a deduction for whatever is spent on their exempt purpose. If Harvard were to use a portion of its endowment for student scholarships, for example, that would be deducted form Harvard’s taxable income. The same for the Catholic Church.

Second, I’d make the charitable contribution deduction a tax credit of 20 percent of the contribution and limit contributions to gifts of cash. The current mishmash that is section 170 of the tax code is the subject of significant abuses, principally because the deduction is allowed for gifts of property other than cash.
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Donna Bobek Schmitt

Associate Professor of Accounting, Darla Moore School of Business, University of South Carolina

How would a cap on deductible donations or a move to a refundable credit affect individuals, government, and nonprofit organizations?

It varies dramatically depending upon the charity. See for example a recent Accounting Review article (Yetman and Yetman, Volume 88(3): 1069-1094) which shows that donors’ sensitivities to the tax incentives associated with chartable giving is much greater for private foundations than public charities. In addition, most people (two thirds) do not get any tax benefit for giving to charity under current tax rules because you must itemize your deductions (as opposed to taking the standard deduction) to benefit. A tax credit (as opposed to a deduction) would be available to all taxpayers; but without knowing how it would be structured it is hard to say what overall effect it would have on charitable giving (e.g., if the credit was relatively small, it could have a negative effect on the charitable giving of wealthier taxpayers who are the most likely to contribute to charity).

Could the problem (if there is one) be instead with how tax-exempt organizations are classified? For instance, there are more than 1 million tax-exempt organizations in the U.S., including giants like the NFL.

Not all tax-exempt organizations are chartable organizations. For example you cannot get a charitable deduction for ‘contributions’ to the NFL, or political action committees etc.. The issue of what type of organizations should be “tax-exempt” (i.e., net income not taxed) versus how/whether contributions to public charities, religious organizations and foundations should be tax-favored are two very different issues.

If it were up to you, how would you alter the tax code as it relates to charitable giving and tax-exempt organizations?

I have no opinion about tax-exempt organizations. With regard to charitable giving, if it were up to me, I would do away with all itemized deductions and replace them (to the extent they should stay around) with tax credits. The current system of itemized deductions disproportionately favors higher income taxpayers. Doing away with itemized deductions and trading them for tax credits would be more fair and could mean that rates could be decreased in exchange.
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Steven J. Willis

Professor of Law, University of Florida, Levin College of Law

There has been a lot of talk lately about altering the charitable giving tax exemption for individuals – what, if anything, will eventually come of this?

I would repeal section 170 (the charitable deduction) along with similar gift and estate tax deductions.

Most persons deduct nothing: to deduct, one must itemize. That favors homeowners with a large loan secured by a mortgage and persons in states with an income tax. The resulting distortions are problematic and difficult to defend.

Also, most studies suggest the charitable deduction favors education and the arts; in contrast, gifts to religious organizations and charities that aid the poor tend to be inelastic. In my opinion, if you like the opera, pay for it, but you don’t deserve a tax benefit. Ditto with museums and schools. Churches and food banks (which I tend to favor) will do fine. Also, many wealthy persons use and abuse foundations to aid their families. That problem has been horribly exacerbated in the past two decades with donor directed funds (abominations). When I first taught tax exempts, they were considered felonious; now they are a right. Outrageous.

If we repeal 170, we promote fairness (equity) and reduce itemization. With that, we could likely then repeal the deduction for state and local taxes (another distorting provision) because it would become far less valuable. Then, we could get rid of the interest deduction for home loans and itemization entirely. That would be a huge simplification which would justify lower rates which would promote economic activity. I can spend my money better than you can spend it: so keep tax subsidies to a minimum.

The cost of section 170 is huge because it creates complexity, favors the wealthy, misleads the masses (who mistakenly believe their contributions benefit them). Repeal would not harm churches and food banks; indeed, with lower rates, I and many others would likely give more.

How would a cap on deductible donations or a move to a refundable credit affect individuals, government, and nonprofit organizations?

A credit was tried in the late 70′s. Did not work and will not work. A refundable credit would be a horrible idea: the fraud that would result would be huge. As it is, such provisions as the child tax credit and earned income credit largely produce fraud. Please, do not add another temptation for cheaters: and to do it on the name of charity is particularly obscene.

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