Whether and how to reform the tax code—perhaps in some quite basic ways—is a question very much on the table these days in Washington, thanks to a recent push by Senators Max Baucus and Orin Hatch of the Senate Finance Committee to require justification for any and all tax deductions. Its a question pertaining to philanthropy and those groups which rely on it; the nations vital $300 billion in annual charitable giving is fueled in no small part by the tax deduction for charitable giving.
With this as backdrop, I recently engaged the sort of basic question the Finance Committee has in mind, asking whether the charitable deduction is necessary or appropriate for those non-profit groups—especially in whats known as human services—who have come to rely extensively on direct government funding, in addition to their private donors. Its a suggestion born of some frustration with our capacity in the U.S. to make progress on some pressing social issues. Over the past generation, even as government spending on human services has increased, indeed, becoming commonplace for the first time in our history, key social problems—think here of the racial achievement gap in education or teen pregnancy—have stubbornly persisted. Might it be time to encourage fresh new approaches to these problems by limiting the charitable deduction to those groups which do not rely on government funding?
In response, Ive received some thoughtful criticism. One comment came from someone associated with a group with a wide range of non-profit clients who suggested that my proposal might make sense for human services groups—which the Urban Institute has estimated receive at least some $100 billion in government support annually—but that a broader change in the tax code might be overly disruptive to the wide range of organizations which rely on charitable giving. Another noted that universities, both private and public, receive significant federal research support, and that limiting the charitable tax deduction might serve to make them, as well as other organizations such as charter schools and community hospitals, even more dependent on unpredictable and (post-sequester) even unreliable public funding. That could be true, as well, one comment noted, of groups which receive indirect government support, such as those K-12 schools which receive both private charitable support and income from education vouchers. Nor, as Ive written here previously, should we want only select types of groups to qualify for the charitable deduction—museums can uplift the poor as well as the rich.
Finally, a friend from a major university noted that the Internal Revenue Service no longer requires non-profit filers to provide the full picture of government funding received. Grant income must be noted—but fees and government payments such as those from Medicare and Medicaid need not be specifically cited.
All of this suggests that, even if a non-profit sector truly independent of government support might be ideal, the two sectors are currently so deeply-intertwined that one must take care in disentangling them. I continue to be frustrated by our human services sector and concerned that the experiment of the past 50 years to join the once-independent charitable sector with government funding (undertaken in the name of expanding the reach of charitable groups) has not worked as envisioned. In that context, the best near-term step for philanthropic donors may simply be to ask organizations to which they are considering making grants about the extent of the government support they already receive. In other words, one can preserve the beneficial aspects of the charitable deduction, while building a truly independent sector one gift at a time.
Original Source: http://www.forbes.com/sites/howardhusock/2013/07/16/tax-reform-and-philanthropy-ii/