11/22/2010 04:47 pm ET | Updated May 25, 2011

Who Gets Hurt By Charitable Contributions to Education?

In many states, school funding relies on a set percentage of the property taxes gathered within the district. In affluent areas, property taxes are likely higher, meaning schools receive a hefty check. In poorer districts, the percentage gained from the lower taxes results in minimal operating funds. In the 1970s California took measures to eradicate the wide disparities in school funding with a state supreme court litigation series known as Serrano v. Priest. With the additional help of Prop 13, school finance was restructured so the state had more control in the collection and redistribution of funds among school districts. Instead of relying so heavily on property taxes, which were proving to generate issues of equality and constitutionality, the current system de-emphasizes local taxes and draws funds from the state budget. In theory, this top-down allocation of funds provides pupils across the state with equal access to well-funded programs. On the surface, states seem to level out the playing field with these finance models, but a closer look shows a different story. The issue at hand is that current federal tax policy actually undermines this restructuring by giving a huge loophole in the form of tax incentives to affluent families, and neglecting students in low-income schools.

As a result of the redistribution of K-12 money, schools that had run on large publicly funded budgets saw their funds diminished. The pending cuts to arts programs, extracurricular activities, and academic staples jarred wealthy parents into donating large amounts to their local education foundations (LEFs).

At first glance, one might think that incentivizing educational giving could only be good for our nation's schools. No one wants programs cut or teachers fired, so if the redistribution of tax money threatens some schools, we might hope that individuals make up the difference privately.

In 1917, the United States began providing tax breaks and institutionalized charitable giving with the primary justification that nonprofit organizations targeted social issues that would otherwise come out of the tax base and be dealt with at the government level. Education has been a longstanding part of the nonprofit world; philanthropic donations to education are tax deductible because, as I wrote last week, education is widely accepted as a social institution in the United States. Education is set in a charitable category of its own. This means that an individual who gives to a LEF receives a tax break when they itemize the donation on their taxes. Because all educational organizations fit under the tax-exempt heading, giving to any school or school foundation regardless of the "need" of the students deems the donor worthy of a tax benefit.

While at Stanford, I was privileged to work with a brilliant professor, Rob Reich, on his project called "Ethics, Public Policy, and Philanthropy." Reich's work focuses extensively on philanthropy, but much of his research touches on the ethical implications of private giving in the education world. At the core of philanthropy is a desire to help the less fortunate, but private giving in education has actually demonstrated a more dismal trend: wealthy individuals receive government subsidies in the form of tax deductions for donating to their children's schools.

Delving more deeply into the policies and implications of tax incentives, we can see that the current tax incentives actually reward the wealthy and marginalize the poor by re-routing government dollars to affluent schools. The "upside-down effect," Reich explains, occurs when people in higher tax brackets receive a greater deduction when they donate a given amount of money than someone would in a lower tax bracket. Here is a more concrete example:

The mechanism of a tax deduction for a donation creates a subsidy by the government at the rate at which the donor is taxed. So a person who occupies the top tax bracket -- currently 35 percent -- would find that a $1,000 donation actually 'cost' her only $650. The government effectively pays $350 of her donation, subtracting this amount from her tax burden (Reich, 2006).

In a valiant effort to equalize school budgets, when put into political context, moving from a property tax-based system to a more distributive one did not change the economic equality of schools in California. LEFs in wealthy districts collect thousands of dollars more per child than LEFs in poorer districts. For example, the data that Reich compiled on charitable giving determined that in one year the Woodside School Foundation was generating $7,065 per pupil, whereas Los Angeles School District garnered a whopping $18 per student.

It's no surprise that school foundations in wealthier areas can amass more money for their schools through charitable donations. What is rather shocking is the heavy hand the government plays in subsidizing these donations. For every dollar spent on education, a wealthy person might pay $0.65, whereas someone in a lower tax bracket would be paying $0.90 if they itemize the contribution. The federal government pitches in the rest. Furthermore, donors in higher tax brackets are much more likely to itemize their taxes than low-income families, revealing yet another layer of institutionalized bias toward more affluent schools.

Schools in low-income neighborhoods, without the uber-involved, wealthy LEFs must rely on their test scores and recovery funds to get desks and test books. Art programs and smartboards are quite a stretch for schools without supplementary funding from local foundations. Though I only touched the surface of Reich's substantial research, in a time when people are pushing for system-wide reform in schools, we need to remember the political and economic frameworks that impact how our education system operates. I am not qualified to determine any economic restructuring, nor do I tout the dissolution of the philanthropic sector. I simply wish to invoke some critical thought about how we are funding our schools. Perhaps a rethinking of philanthropy's role in education is in order:

"when philanthropic activity actually worsens inequality, any justification for the state's provision of special tax treatment to philanthropic organizations is considerably weakened and perhaps entirely eroded" (Reich 2006).