America's charities face a brewing crisis with the upcoming comprehensive tax reform debate that is almost certain to envelop our nation. As Congress searches for ways to close the growing national debt, the charitable tax deduction is included in the "everything" often mentioned in the phrase "everything is on the table."
Many political observers believe that the Simpson Bowles report will serve as the framework for a "grand bargain" that both modifies the tax code and reduces the deficit. Under Simpson Bowles the traditional charitable tax deduction would be eliminated in favor of a 12 percent tax credit. The president on the other hand has consistently proposed capping the charitable deduction at the 28 percent rate for wealthy individuals -- those who provide the largest gifts. Governor Romney's plan makes no specific reference to the charitable deduction.
Any of these approaches have unknown consequences, but they all seem likely to reduce the incentives for charitable giving at a time when the charitable sector is being called on -- often unreasonably -- to perform more of what government used to do.
All kinds of scenarios seem possible. Among the scariest: New approaches that favor some types of giving over others. After all, some will surely argue that a gift to the local food bank deserves greater preference than a gift to a symphony. The independence of philanthropic giving is essential to its ability to serve, support and impact change. Ranking or prioritizing non profits is a dangerous trade off exercise.
The non-profit sector is doing work that is critically important to our communities. Last year, Americans gave almost $291 billion to support food pantries to feed the hungry, youth programs to keep kids in school, provide screenings to help people detect disease and hundreds of other causes.
It would be a huge mistake to begin tinkering with the charitable tax deduction. To a greater extent than any other public policy, the charitable deduction has provided an incentive for Americans to support social innovation and the effective delivery of social services. Reducing those incentives, and in effect shifting these resources to government control ought to be anathema to conservatives who believe that any program that can be shifted to private hands should be. Similarly, the left should believe that providing education, human services and healthcare to the needy isn't one of the places we should be cutting. It's hard to see who would think this was a good idea.
The effect of reducing the incentives for charitable giving simply forces an irrational shift of resources from one societal pocket (the nonprofit sector) to another (government) without any data to suggest that the latter is better prepared to deploy it.
The charitable deduction is fundamentally different from other deductions in the Revenue Code: It provides incentives for taxpayers to do something that benefits society rather than themselves. After all, if I deduct the interest on my home mortgage it makes it possible for me to buy a bigger home. Whether that has a logical public policy purpose or not, it's clearly different from encouraging my recent contribution to Breast Cancer Support Services, an organization that helps people suffering from breast cancer (and where my wife volunteers as a board member)
Congress should take no action that reduces the incentives to support the critical work of the non-profit sector. While the challenges the nation faces with its budget crisis are undeniable, reducing the flow of funds from the charitable sector in favor of government makes no sense.
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Next question is obviously, how much of the money donated to a church is used for "operating expenses" and how much for charitable works?