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The Long-Term Threat to the Charitable Tax Deduction

December 14, 2012

By Howard Husock

As the fiscal cliff looms, representatives of U.S. non-profit organizations are circling the wagons to defend the charitable tax deduction from Congressional action to cap or otherwise limit it. Well they should. The $300 billion, highest per capita among OECD nations, in annual philanthropic giving provides the lifeblood for medical research, higher education, the arts and a range of programs that assist and uplift the poor. Even a relatively modest change long-favored by the Obama White House—limiting the tax benefit of a charitable donation to 28 percent of its value, even for those paying higher tax rates—would, it’s been estimated, reduce charitable giving by 1.3 percent, or some $3 billion. An overall cap on tax deductions of all kinds could have even more drastic effects.

But beyond the immediate threat to the charitable deduction lies a far more serious one—the belief of increasingly influential groups that the deduction should be limited to specific types of causes. It’s the sort of apparent compromise that could quietly emerge from the fiscal cliff negotiations. Such a change would be a dangerous departure from American tradition, in effect making charity—the independent sector—little more than another arm of government.

Central to all this is the fact that the charitable deduction is today seen, along with the deduction for mortgage interest and state and local taxes, as just one more "tax expenditure"—foregone tax revenue that otherwise would go to the Treasury. In this understanding, income is, by default, taxable—and any limitations on tax liability must pass a test based on what is deemed to be in public interest. Increasingly, this is leading to the view that not all charitable contributions are created equal—and, indeed, that too few are directed to those providing direct services for those most in need, understood to be the underlying premise for the tax deduction.

This school of thought has long been championed by a relatively obscure but influential group called the National Coalition for Responsive Philanthropy, which is explicit in its view that charity should be directly targeted to "underserved communities" for purposes of "social justice"—and emphasizes the importance of philanthropy "benefitting economically disadvantaged people, the elderly, women and girls and other marginalized groups". Moreover, NCRP sees the question of whether a charitable donation serves the public good as not to be left just to the discretion of donors. Indeed, it’s clear that it sees the public good as synonymous with grantmaking to community groups in low-income areas.

"NCRP believes that the public has a legitimate interest in the use of philanthropic resources. Donors receive the privilege of tax deduction for charitable donations and tax exemption on investments.. . . To strengthen democracy, grantmakers should provide sufficient resources to people and communities with the least wealth and opportunity. They should trust those in need and closest to the problems to play a powerful role in crafting and carrying out solutions, and they should provide support for civic engagement, policy advocacy and community organizing so that organizations working with and on behalf of marginalized communities can participate effectively in the public square."

It is a view which is finding resonance as the question of how to structure the tax code is very much in play.

In a recent interview with Nonprofit Quarterly, Democratic Congressman Xavier Becerra, a member of the tax code-writing Ways and Means Committee, put it this way: "I start off with the proposition that if you’re getting a tax subsidy, another taxpayer must make up for what you’re not paying. That subsidy should serve a good purpose. . .Statistics I’ve seen suggest that only 1 in every 10 dollars are serving poor people or disadvantaged people. I have to wonder where the other 9 dollars are going." Similarly, New York Times economics columnist Eduardo Porter has asserted that "philanthropy is pretty much unaccountable to society. Unfettered by democratic controls and dictated by the preferences of donors, it doesn’t have a great track record of devoting itself to our most pressing social needs."

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