Virtually every provision of the Senate’s COVID-19 relief legislation will lead to more federal spending, but some important sections will actually lead to less — by increasing incentives for charitable giving. Such giving is critical during this moment of crisis, but these incentives will continue to matter once it’s passed.
The key provisions would extend a tax benefit for charitable giving to all taxpayers, not just the few relatively affluent households that itemize their deductions.
The numbers could be significant. Draft legislation allows for a $300 deduction for all taxpayers. A proposed amendment, backed by an impressive range of senators, including Oklahoma Republican James Lankford and Minnesota Democrat Amy Klobuchar, would make an expanded charitable deduction of $4,000 for single taxpayers and $8,000 for married couples available even to those who don’t otherwise itemize.
Both are crucial additions to the tax code and recognize that, when America is in crisis, civil society steps in to provide assistance, whether to those who need food deliveries but are not Amazon Prime members or those who need basic shelter. Meals on Wheels, local churches, synagogues, and mosques are all aspects of America’s civil society.
It’s further a recognition, that, whatever the benefits, the 2017 tax reforms drastically decreased the tax incentive for charitable giving, which preliminary IRS data shows already fell by 3% in 2018. That’s because prior to the reforms, some 30% of taxpayers itemized their returns. After, that number dropped to just 10%.
That means the charitable tax incentive is attractive mainly to the affluent — those who have high enough incomes that their deductions overall are greater than that permitted by the so-called standard deduction. We should not want charity to be the narrow province of the rich, and the Senate’s proposed legislation would help address that perverse incentive.
For those nonprofit organizations that rely, in whole or in part, on charitable giving, the need is clear. In times of crisis, demand for their services grows while giving falls, especially as people watch the value of their assets decline.
For all its benefits, the proposed legislation does have an important drawback. It excludes charitable contributions to so-called donor-advised funds, individual charitable-giving accounts to which taxpayers contribute and disburse funds over time. The thinking here reflects a growing liberal crusade against donor-advised funds, which some claim are a tax “loophole” because grants are not all made the same year as contributions. The legislation would provide an incentive only for cash grants to help during the immediate crisis, not longer-term funds such as donor-advised funds.
This makes some superficial sense, but it ignores the fact that donor-advised funds, which have grown by the millions under the auspices of financial giants Fidelity, Vanguard, and Schwab, are also a way for taxpayers to set aside charitable funds in good times and then disburse them when times are hard. That’s exactly what happened during the 2008 financial crisis and may well begin to happen again now. This is not the time to limit charitable giving of any kind, but to trust our civil society to respond to need, no matter the particular vehicle they choose to use.
Even with these limitations, the fact that charitable giving is part of the proposed relief package is impressive and sends a critical message. It’s an acknowledgment that not all relief spending is best directed by the government — civil society has a role to play, too.
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