Rethinking the Way We Tax Charities and Those Who Give to Them

By :: December 27th, 2011

It is that time of year when we celebrate with family, remember all we have to be thankful for, and scramble to squeeze out those last few dollars of tax deductible charitable gifts. And that got me thinking about the tax treatment of charities and other non-profits.  

It is surely true that we give for more than just the tax write-off. But that deduction is worth big money. In 2008, roughly 40 million taxpayers gave more than $170 billion in charitable donations, according to my Tax Policy Center colleague Joe Rosenberg. About $35 billion or more than 20 percent were non-cash gifts--nearly half in the form of stocks and other investments.  And more than 90 percent of that stock came from those making more than $200,000.

The tax treatment of non-profits themselves is generous and complicated. And it is useful to keep in mind that the non-profit sector includes a wide range of organizations. Religious institutions, soup kitchens, symphony orchestras, universities, foundations, trade associations, and think tanks (including TPC’s parent organizations The Brookings Institution and The Urban Institute) are all organized under Section 501(c) of the Internal Revenue Code.

So are some secretive shell organizations that raise and contribute cash on behalf of political candidates and such commercial enterprises as the United States Olympic Committee, the NCAA and, yes, even the National Football League--which reported $8 billion in revenues in 2009.

While many of these non-profits may not accept tax deductible gifts, they still enjoy other tax benefits. They are exempt from federal, state, and local income taxes and in some cases from property and sales taxes. In Boston, for example, non-profit educational and medical institutions were exempt from paying an estimated $390 million in property taxes in 2011. This accounted for one-quarter of Beantown’s total property tax and more than 16 percent of its entire budget, according to Daphne Kenyon and Adam Langley.  

Organizing as a non-profit has other advantages as well. For instance, while these entities must report some financial information, their Form 990 disclosures are far less informative than what public companies must report to their shareholders. This has proven to be especially valuable for a new class of campaign finance fronts that operate as non-profit affiliates of Super PACs such as the Republican-oriented Crossroads USA and the Democrat-oriented Priorities USA.

In an environment of severe budget constraint and at a time when policymakers are considering both budget and tax reform, is it time to rethink the role of charities and other non-profits?

Do we want to continue to grant special tax treatment to what are obviously commercial enterprises? Should the Tax Code be used as a tool to hide the names of mega-givers to political candidates or the activities of lobbyists?

Is the tax deduction, which disproportionately benefits high-income givers, the right approach? What about a tax credit or a cap on deductions—an idea that is getting new attention as an element of tax reform.   

As government’s role as a social safety net shrinks, the role of non-profits will only grow. Yet, these organizations face their own severe financial problems. The challenge will be to find a way to continue to encourage people to support charities but in a way that is both fair and provides the biggest bang for the fiscal buck.

6Comments

  1. Michael Bindner  ::  3:22 pm on December 27th, 2011:

    Moving to a consumption tax system will change what charities can and cannot claim. Contributions to charities would not be subject to VAT, but sales from them would be, as would be their purchases. A VAT-like net business receipts tax would also likely have not exemption to the extent to which this tax replaces revenue now collected in payroll and income taxes on employees of these firms. I propose a surtax on high incomes (Lawrence B. Lindsey does not) which would have a charitable contributions deduction, as well as an exemption for sales to a qualified ESOP, but no other deductions. The surtax would range from 7% to 28%, a tax rate so low that the deduction will be less important.

  2. Jack B  ::  9:31 am on December 28th, 2011:

    I would like to see all charitable deductions gone and replaced with a non refundable credit at some low percentage rate. Why should a high income persons charities be subsidized at a higher rate than a low income persons?

  3. Annette Nellen  ::  1:22 am on December 29th, 2011:

    Yes – change is needed for many reasons including that the charitable contribution deduction provides a greater subsidy to higher income individuals. Also tax-exempt status provides similar benefits to charities that have different needs and that provide varying community benefits (from those highly needed to those that might not be needed). The deduction should be converted to a credit. The credit should only apply if donations exceed a set percentage of income that includes non-taxable income.

    A review of “charitable organization” is warranted due to reasons noted in the comment above.

    State and local governments should review property tax and sales tax exemptions to determine if they are truly warranted. In California, issues have already been raised as to whether all California located charities are entitled to a property tax exemption depending on whether they provide a meaningful benefit to Californians, which isn’t always easy to determine for all charities. (see http://www.boe.ca.gov/proptaxes/pdf/lta11044.pdf
    and http://21stcenturytaxation.blogspot.com/2011/08/california-property-taxes-in-news.html) Seems there should be limitations on this exemption such as based on amount of property owned and its uses. After all, the charities are using local services and obtaining community benefits and should be paying for them in some way. And state and local governments are hurting for funds. The tax might also cause some charities, including churches to rethink the amount of real property they own. There are two churches near me with enormous parking lots that are mostly empty. So not only is the government not collecting property tax on the space, the government is paying for its own parking and storage lots.

    Back to income taxes, the charitable contribution deduction is just one of many tax expenditures in need of reform in order to make the tax system simpler and more neutral, equitable and transparent.

  4. John B.  ::  5:25 am on December 29th, 2011:

    I do agree with Jack that in some cases, the charity organizations serve more for promoting rich and famous people than help those in need. So why they should be tax free? I have maybe one little advice – you can use other charities, that are abroad. In this case in Canada, where is different tax and law system for charities and non-profit organizations.

  5. Around The Dial – January 5, 2012 | South By North Strategies, Ltd.  ::  3:05 pm on January 5th, 2012:

    […] TaxVox analyzes the tax deduction for charitable contributions. […]

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