November 29, 2012

Time to Revisit the Charitable Deduction?

It’s time for social sector leaders to acknowledge the dire fiscal straits the US faces and to join the search for a practical, bi-partisan solution in which a range of interests can make sacrifices for the common good, including a hard look at the charitable deduction.

By: Daniel Stid

Earlier this month I participated in the Independent Sector's annual conference in San Francisco. It was a great opportunity to see old friends and pick up new ideas. The only discordant note came when I was handed a flyer upon registering that encouraged me to "tell your Members of Congress: Don't Limit the Charitable Deduction during the Lame Duck Session." I was guided to a bank of computers set up to help conference-goers do so, at which I could make use of a handy auto-loading form email to send to my representative and senators simply by plugging in my zip code. Taking all this in, I found myself asking, et tu, Independent Sector?

The Independent Sector is not alone in its unstinting defense of the charitable deduction. It is one of more than 30 nonprofit umbrella groups and trade associations participating in The Charitable Giving Coalition, including the Council on Foundations, the United Way, the American Society of Association Executives, and The Association of Fundraising Professionals, which chairs the group. On November 14th, Coalition members sent a letter to President Obama urging him "not to impose any limit or cap on the charitable deduction, including your proposed cap limiting all itemized deductions at 28 percent for certain taxpayers" (i.e., the high income filers in the top two tax brackets). The 33 signatories sent similar letters to the leaders of both parties in Congress and have invited supporters to converge in Washington next week for their "inaugural Capitol Hill fly-in event," declaring, "now it's crunch time. The stakes have never been higher."

Consider the backdrop: as the President and Congress have returned to Washington after the election, they are confronting the monumental task of finding some way to redirect our spending and tax policies to prevent going off the fast-approaching fiscal cliff and plummeting our economy into recession. The conventional wisdom holds that the ideological gulf between the parties prevents them from compromise, but in my view the real gridlock stems from an underlying commonality between them. Both are hogtied and staked out like Gullivers by so many Lilliputians in the form of countless interest groups and advocates, each zealously guarding their particular nook and cranny of the federal budget and tax code, even though the net effect of these provisions is unsustainable and pushing us closer to the brink.

I know some readers' hackles are already rising at the suggestion that the Coalition's defense of the charitable deduction is roughly equivalent to, say, the National Milk Producers Federation's defense of dairy price supports, or the National Association of Realtors' defense of the home mortgage interest deduction. But when it comes to making the case for subsidies and tax breaks, everybody tends to think they have a principled position supporting the public good—those other groups are the ones pursuing a narrower set of interests. Nonprofit associations are no exception here. And rest assured that those other groups can describe hardworking dairymen or the virtues of home ownership in ways that mist the eyes of the most hard-bitten politico.

If the Coalition members seem a bit frantic and breathless in their rhetoric—emphasizing that "It is critical that policymakers hear from us NOW"—it is because they have so much to defend, namely, the huge pile of money that the charitable deduction pulls out of the Treasury. The Tax Policy Center estimates that in 2008, the charitable deduction was the sixth largest tax expenditure and cost the federal government $46.8 billion. No wonder that the Obama Administration and some members of Congress see a capped deduction as a necessary part of the equation to begin resolving our fiscal problems.

The difficulties facing sector advocates are compounded by the pummeling that increasingly shaky arguments for the charitable deduction have taken recently at the hands of Rob Reich of Stanford University, Charles Clotfelter of Duke University, and Matt Bishop of the Economist, among others. They have thrown harsh light on the fact that, rather than counterbalancing privilege in our society, the charitable deduction reinforces it; wealthy individuals are much more likely to itemize their returns and take advantage of the deduction, and their giving is subsidized in greater proportion given their higher marginal tax rates. Data from the Joint Committee on Taxation of Congress indicates that in 2010, tax filers with incomes over $200,000 accounted for only seven percent of the taxable returns but captured 58 percent of the tax expenditures from the charitable deduction. As Clotfelter observes, the current policy "has the effect of handing over to wealthy individuals an extraordinary amount of influence over the allocation of public funds."

Most don't use this influence to fight poverty. A Congressional Budget Office analysis found that 65 percent of deducted contributions from donors with incomes of a million or more went to education, health, and arts nonprofits, whereas only 4 percent went to "organizations devoted to helping meet basic needs." While major gifts to Harvard University, the Mayo Clinic, or the Metropolitan Museum of Art are going to worthy causes, it is not clear—especially at this juncture in our nation's history—that their donors should continue to be subsidized at the same rate through the tax code.

Reducing the charitable deduction will not necessarily mean that society has fewer resources at its disposal. Matthew Bishop notes that among economists studying the effects of changes in the charitable deduction, "the consensus estimate of the tax-price elasticity has diminished to significantly less than one." This means that we could expect that the increased tax revenue from the Administration's proposal to cap the charitable deduction for top earners would more than offset any resulting reduction in their giving.

If all else fails, advocates for holding the charitable deduction sacrosanct are apt to invoke Tocqueville and warn against undermining the rich associational life that, as the Frenchman first observed in the 1830s, provides the very backbone for democracy in America. Don't get me wrong, I am as big a fan of Tocqueville as the next person. But if the charitable deduction is so central to the health of our voluntary associations, how could they have impressed Tocqueville with their vitality, some 80 years before there was even a federal income tax from which charitable contributions to them could be deducted?

An old Washington saw holds that, if you are getting run out of town, why not turn around and act like you are leading the parade? This would appear to be a good time for social sector leaders to acknowledge the dire fiscal straits that our country has to navigate through and to join in the search for a pragmatic solution in which a range of interests accept some sacrifice for the good of the whole.

Ironically, it is the leaders of corporate America who are rising to the occasion and endorsing Erskine Bowles' and Alan Simpson's bi-partisan and solution-oriented Fix the Debt campaign. Who do you think will end up having a better seat at the table and more influence in the months ahead—the business leaders who are prepared to support increased tax revenues if that is what it takes, or the social sector leaders calling out President Obama for having the temerity to suggest that the highest income Americans have their charitable deductions capped at 28 percent instead of 33 or 35 percent. Is this really the issue on which the social sector wants to nail its colors to the mast?

Perhaps the biggest problem with the die-hard defense of the charitable deduction is the opportunity cost it presents in the form of what social sector leaders are not speaking about so long as this issue is at the top of their agenda with policy-makers. Our country faces a range of pressing problems that are begging for a solution, from failing schools and rampant homelessness to accelerating climate change and a prison-industrial complex that ensnares 1 out of 3 black men over the course of their lives. Any one of these issues—and many more like them—warrants a convergence of sector leaders to press the urgent need for a solution in the halls of power. Yet so long as nonprofit leaders are jostling with the dairy farmers and real estate brokers and the bevy of other interests in these same corridors, with everyone determined to preserve their benefits and subsidies and tax breaks without modification, our voices risk ending up sounding remarkably like everyone else's.

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