Charities Should Support Bush Tax Cut

By LESLIE LENKOWKSY

Now that President Bush has presented his budget to Congress, serious debate is about to begin on the administration’s tax proposals to stimulate philanthropy. Unfortunately, while charities are lining up behind several Bush proposals that could pay modest dividends for philanthropy, they and their political allies are likely to oppose the one measure that would do the most to stimulate giving: an across-the-board tax cut.

Charities fear that a tax cut would curtail federal aid for the poor and reduce people’s incentives to give by lowering tax rates and therefore the value of the tax breaks they get for making charitable donations. But a tax cut would help to revive the dormant economy, thereby making more money available for charitable donations and decreasing the likelihood that people will hold back on giving for fear they will need the money themselves. A study released last year by the Clinton administration bears this out by attributing the outpouring of giving in the latter part of the 1990’s chiefly to the strength of the economy.

Though worthy of support, other Bush proposals are unlikely to produce the gains for charity that a general tax cut would.

Chief among those other proposals — one that is backed by both Republicans and Democrats — is to give the approximately 70 percent of people who do not itemize their deductions a way of reducing their taxes by writing off their charitable gifts. In President Bush’s version, this so-called nonitemizer deduction would allow them to reduce their taxable income, dollar for dollar, for contributions up to the amount of the standard deduction, which currently is $4,550 for single people and $7,600 for married couples filing joint returns. Above that threshold, they can itemize their deductions and write off their charitable gifts, as a minority of taxpayers do now.

According to a study by PricewaterhouseCoopers that was commissioned by Independent Sector, had this proposal been in place last year, it would have increased giving by $14.6-billion. While that seems like a hefty sum, however, the estimate may well be overstated.

Although many people claiming the deduction would have been first-time givers, PricewaterhouseCoopers could not fully account for those who have been making sizeable gifts and claiming the itemized deduction for them, but who may now find the combination of the standard deduction and nonitemizer deduction more valuable. Nor could it fully account for those who already contribute to charity without getting any tax benefits. The Urban Institute estimates that people who don’t itemize donated $27.4-billion in 1998.

What’s more, because the nonitemizer deduction is projected to reduce tax receipts by $75-billion over 10 years, the provision could wind up costing the federal government almost as much as it raises in additional money for charities.

To avoid this, Congress is likely to insist that people give a minimum amount before starting to claim a deduction. In a version offered by the Clinton administration, taxpayers would have had to contribute at least $1,000 initially to qualify. Yet while a minimum-giving requirement would substantially reduce the cost of the non-itemizer deduction, it also would drastically reduce the amount of new donations it produces.

The other Bush proposal sure to gain support from charities would permit people to transfer individual retirement accounts tax-free to charity. With the money in them growing, and even more assets set aside in other kinds of savings plans that could be treated similarly, the funds potentially available for such philanthropy could amount to trillions of dollars. The question is, how much would go to charities even without a change in policy?

No one knows for sure. If people wanted to donate all or a portion of their retirement accounts to charity today, they would first have to pay income tax on what they withdrew. Under the Bush plan, they would not. Thus, the additional funds for philanthropy would simply equal what they would have otherwise paid in tax.

A version of this proposal, introduced in the last Congress, was estimated to cost the federal government $2.6-billion to $3.1-billion over 10 years, a tiny sum in relation to likely charitable giving during the decade.

To be sure, some fund raisers believe that the proposal would lead to more donations of retirement savings, especially if the money could be used for deferred-giving plans as well as for outright gifts.

But with potential changes in Social Security that might increase reliance on personal savings, the opposite could occur. Moreover, some people might underestimate what they will need for retirement and health care — or be lured into making premature gifts — especially if they were allowed to donate their retirement accounts tax-free after age 59, as the Bush plan would permit.

A third Bush administration proposal will get a chillier greeting than either the nonitemizer deduction or the retirement-savings plan when it is unveiled later this year. The plan would encourage states to create income-tax credits for donations to antipoverty groups by allowing the states to use federal welfare money to offset losses in tax revenue.

Nonprofit groups are apt to object to this measure because it not only reduces government spending for the poor but also singles out one kind of charity for more favorable treatment than others. However, at least 20 states already have tax credits aimed at particular types of organizations. And, far from lowering government expenditures, the Bush proposal might help governors and others justify maintaining current antipoverty spending, despite a sharp decline in welfare caseloads recently.

A bigger problem with the tax-credit idea is that it may not be very productive. Donors are likely to shift their giving from one charity to another, or to claim a benefit for contributions they would have made anyway. Difficulties in defining eligible antipoverty charities, or in identifying them easily for taxpayers, may further diminish the amount of money the tax-credit idea would produce for the poor. A similar credit already on the books in Arizona has so far been a disappointment.

The modest potential of the administration’s proposals ought to be a reminder of how much more fundamental an expanding economy is for philanthropy. If, as an increasing number of people seem to believe, an across-the-board tax cut will stimulate economic growth, charities would be wise to support it. After all, philanthropy would be among its biggest beneficiaries.

Leslie Lenkowsky is professor of philanthropic studies and public policy at the Center on Philanthropy at Indiana University and a regular contributor to

The Chronicle. His e-mail address is llenkows@iupui.edu.