Archive for February 9th, 2011

February 9, 2011

Taxes Part 4: Why Have a Charitable Giving Tax Deduction?

Total charitable giving in the U.S. in 2009 was $303.75 billion (2.1% of Gross Domestic Product), according to Giving USA 2010. Of that figure, $251.21 billion (83% of the total) came from individuals. Clearly, individuals are the backbone of American philanthropy.

Many in the nonprofit sector believe, backed by some research studies, that charitable giving remains strong in the US in part because of the incentives offered by the Federal Government. This is the primary reason why many in the sector support the charitable gift tax deduction. It also is why many are concerned that the government might adopt one of the proposals for either eliminating, reducing, or replacing the charitable gift tax deduction.

The consensus that has emerged among a group of large nonprofit organizations is that the Federal Government should preserve giving incentives. Last year, an alliance of 23 nonprofit organizations and professional associations representing tens of thousands of charities sent a letter to President Obama urging him to reject any change to the charitable gift deduction.

The primary reason the consortium backs the charitable giving tax deduction is because the members believe it works to stimulate individual philanthropy. Conversely, the members wrote, “Limiting the value of the charitable deduction does the exact opposite and would fundamentally alter the tradition of charitable giving that has made America one the most generous nations in the world.” For a complete copy of the letter to President Obama and a list of signatories, click here.

Another reason to have a charitable gift deduction is cultural. It is important to have the Federal Government state that charitable giving is such an important duty of citizenship that the government encourages it through the giving incentive. Removing the deduction would send the exact opposite message.

In Canada and the UK, when parliament has contemplated actions impacting the charitable sector, government has engaged the sector in dialogue and both sides have worked closely together to achieve results in society’s best interest. This has been less the case in the US where the relationship has often been adversarial, according to some participants in the process. If the nonprofit sector and the Federal Government can work in concert to arrive at solutions to our challenges, I’m confident that we’ll end up in a reasonably good place. On the other hand, things could get ugly for the sector and society as a whole.

That’s what Michael Rosen says… What do you say?

February 9, 2011

Taxes Part 3: Proposal to Replace the Charitable Gift Deduction with a Tax Credit

There are a number of proposals for modifying or eliminating the charitable gift deduction that are currently being considered on Capitol Hill. One option comes from the Bipartisan Policy Center’s Task Force. The proposal calls for replacing the charitable gift deduction with a tax credit plan modeled after the United Kingdom’s Gift Aid system.

Instead of a donor receiving a tax deduction for making a charitable donation, he or she would receive a tax credit. Discussions have included a credit up to 15% of the gift. However, instead of the donor receiving a direct benefit, it would be the qualifying charity that receives the benefit. Here’s how it would work: A donor makes a contribution of $100. Upon submitting the necessary paperwork, the Federal Government would send the charity a check for $15. If a donor wants the charity to only receive $100 or wants to lower the “cost” of making such a contribution, he or she could contribute $87 to the charity knowing the government would contribute an additional $13.05.

Unfortunately, such a system would require the Federal Government to build yet another bureaucracy to handle the processing. The cost to the government of additional staffing, equipment, and payment processing will not be insignificant. There would also be a cost burden placed on the nonprofit sector. Organizations would need to spend money educating donors and then monitoring and following up to make sure that donors file the proper paperwork and that the government processes that paperwork without error. This is all an unnecessary set of costs.

The other problem with such a system is that it would require a greater degree of action by donors. First, donors would need to calculate their giving combined with the government giving to figure out how much they’re really donating instead of simply writing a check for $100; under the tax credit system, the donor would have to determine whether they want to donate $100 themselves or just $87, for example. In addition, the donor would have to file some sort of paperwork, along with documentation, to prove to the government that a tax-credit grant should be made to the charity. Many donors are likely to skip this step or do it incorrectly.

Even a Task Force member suggested in The Chronicle of Philanthropy that there is risk. Leonard Burman, a professor at Syracuse University, admits that the possible impact is unclear and could reduce major donor giving, particularly for education and the arts. Yet, he still endorses this proposal which he says has been modeled after Gift Aid in the U.K.

So, what do the Brits have to say on the subject of this proposal? Roberta d’Eustachio, the Chief of Staff to the British Government’s Ambassador for Philanthropy said, “This is the worst idea I ever heard. While charities and nonprofits get money from the government, not everybody that could ‘take up’ the Gift Aid option, does. Why? Because they have to tick a box, they have to do something extra in the bureaucracy and people just don’t do it. … This is a disaster waiting to happen.”

The tax credit plan would be more costly than what we have now, more cumbersome, less donor friendly, and likely to result in less giving. The one thing this plan would effectively do is make folks, particularly charities, more beholden to the Federal Government. D’Eustachio says, “The charities can also begin to lobby for ‘more’ money as they have done here in Britain…. It’s $15 of the $100 today, tomorrow they will want more, and pretty soon the charities are having more of a relationship with government than they are with the donor.”

So, in its infinite wisdom, the Task Force is advancing a proposal modeled after the system in the U.K. that the British do not even endorse! That’s What Michael Rosen Says… What do you say?

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