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?

4 Responses to “Taxes Part 3: Proposal to Replace the Charitable Gift Deduction with a Tax Credit”

  1. While I think the proposal to shift to a tax credit for the benefiting organization has several major problems, they simply are NOT the ones you’ve listed.

    The proposal does not call on the individual donor to do anything at all to get the credit for the benefiting organization; that responsibility will be on the organizations. Will there be costs to do so, for both the organizations and government? Yes. Will some of those government costs be offset by the reduction in costs of processing individual tax returns? Certainly. Would the cost be unduly burdensome to organizations that already have to file a 990 each year? Probably not. And again, if your primary concern is that getting the credit would require extra action by the individual donor that is EASILY remedied: make it an opt-out, rather than opt-in system, so the only time an extra step is required of an individual is when they don’t want us to get the additional support. You can read for yourself here: pages 37-40.

    The straw man argument that it would make it hard for me to understand how much I’m giving is just silly. If I want to give $100, I would write a check for $100. Just as under the current system, my interest in giving $100 to the local food bank simply does not include the calculus of “Well, let’s see, given my plan to itemize this year and the existing credit and my marginal tax rate, that’s only going to cost me $84 by the time next March rolls around!” It is, of course, true that we in the sector are going to have to re-think the calculus that leads an individual to write a $500,000 check. But, if there’s one thing we’re really good at in the sector, it’s figuring out persuasive conversations to have with donors.

    As to the likely outcome of reducing major gifts in arts and higher ed (two areas in which I’ve worked and have a personal vested interest), I’d rather listen to the thought leaders in our sector figure out what we need to do to make our case more compelling to the individuals we claim as our supporters rather than bellyache about being picked on.

    At the same time that these organizations will probably be hurt, the organizations providing basic care needs – which generally receive a far greater portion of their support from individuals who don’t itemize – would see a significant boost to their overall revenue. (Of course, such a shift would undoubtedly lead to a re-thinking of the federal block grant and contracting processes on which many of these groups rely for their basic lifeblood, but that’s a completely different conversation.)

    And finally, to suggest that we in the sector all need to get more actively engaged in addressing federal tax policy, so that we don’t wind up with a policy that might cause nonprofits to spend more time engaged in federal tax policy seems curious.

    In terms of the significant issues I have with the proposal (as it relates to the nonprofit sector):

    It would allow my house of worship to gain tax advantage from my tithe. That simply should not be conscionable to anyone.

    There doesn’t appear to have been much thought put into their baseline assumption on ’09 estate tax levels. Their new approach to capital gains (which I generally agree with) doesn’t appear to provide tax benefit for transferring appreciated assets to nonprofits.

  2. While I appreciate David’s additional insights, I must point out that it is difficult to argue the subtle nuances of the tax credit proposal since no formal legislation has yet been drafted. So, we really don’t know what steps would be required of a donor versus the organization he or she supports. What we do know from, at least one Task Force member, is that the tax credit proposal is closely modeled after the British Gift Aid system. Furthermore, we know that the Chief of Staff to the British Government’s Ambassador for Philanthropy has called the U.S. proposal “a disaster waiting to happen.” I’d say that’s a pretty big red flag.

    Finally, folks in the sector should not sit on the sidelines while our elected leaders decide the fate of the nonprofit community. Those closest to the situation are the nonprofit organizations themselves. A collaborative process where government officials work closely with leaders in the nonprofit community is more likely to lead to creative legislation that best benefits the sector and society in general. Again, this has been the case in Canada and in the UK (Gift Aid aside which was developed before the more collaborative culture was developed).


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