The Many Benefits of the Charitable Deduction
by Robert I. Evans and Avrum D. Lapin|
Since late in 2012 and continuing onward through 2013, we are witnessing a heated discussion about the future of the federal charitable deduction. Being called into question is the long-standing federal tax deduction donors receive for part or all of the philanthropic support of charitable and religious entities. While the U.S. Government has put the charitable deduction “on the table,” nonprofits have taken a stronger stance than ever to defend this critical provision for tax deductions. But more efforts are required!
We contend that most American donors do not normally make charitable decisions based on the tax deductions they receive; however, we do know that having the deduction serves to encourage many donors to be more generous. However, for some reason, most payments on charitable gifts take place in the last days of each calendar year and 2012 was no exception.
Since 1917, the charitable deduction has been an essential benefit that motivates philanthropists at all levels. A donor receives a tax break for his/her generosity, and the nonprofit gains access to dollars and thus increases its ability to make a greater social impact. The charitable deduction is unique among federal tax deductions in that it encourages giving that strengthens communities rather than directly benefiting the donor. It rewards a voluntary individual activity with profound societal benefits, and Americans have become quite accustomed to it. The charitable deduction has been paired with two other sensitive and longstanding tax deductions: the state and local tax deduction and the home mortgage deduction.
The charitable tax deduction is among the 10 largest tax expenditures in the U.S. Tax Code, benefiting almost 1.1 million charities and 300,000 houses of worship. More than 37 million Americans contribute to 501(c)(3) organizations every year and take the opportunity to benefit from the tax benefit. In 2010, individuals donated $210 billion to charitable organizations, of which they claimed $170 billion on their tax returns.
No one has to give and this clearly sets apart the charitable deduction from the other two deductions at risk. A charitable deduction rewards taxpayers by providing them an annual mechanism to vote with their pocketbooks for causes that are meaningful to them. It supports a vast array of nonprofits and houses of worship doing great work. Limiting charitable giving incentives would have a detrimental impact on charities across the nation and would hamper the ability of nonprofits to achieve their missions.
The charitable deduction is significant in many ways. First, it maximizes support from individuals seeking to allocate their financial resources in the most effective manner. Donors may minimize tax expenses, while maximizing their charitable impact.
William C. Daroff, vice president of public policy and director of the Washington office of the Jewish Federations of North America, testified in mid-February on the charitable deduction to a hearing convened by the House of Representatives committee on ways and means. He noted that “the charitable contribution deduction remains the only provision in the income tax law where an individual must ‘give away’ income or assets in order to receive a deduction.”
“Proposals to limit the value of the charitable contribution deduction, place a dollar cap on total tax deductions, or transform the charitable deduction into a tax credit with artificial floors and ceilings, would result in less giving, and therefore, cripple charities that strive to remain at the forefront to feed the hungry, clothe the naked, and heal the sick.” We agree!
If support of nonprofits decreases, then their ability to provide support to the communities they serve will also undoubtedly decrease. Consequently, the individuals most at risk are those whom nonprofits serve: individuals who are under-resourced and lack access to quality education, social service, or housing. Myriad nonprofits work to close this gap in society and raise millions of Americans out of poverty. Unfortunately, these individuals will continue to suffer if nonprofits lack the funding to help them.
Caps or limits to the charitable tax deduction could jeopardize billions of dollars in private donations that sustain diverse, worthy causes across America. For example, estimates show the President’s proposal to cap the charitable deduction at 28 percent would reduce giving by up to $5.6 billion each year. The reduction is more than the combined annual operating budgets of Red Cross, Goodwill, the YMCA, Habitat for Humanity, the Boys and Girls Clubs, Catholic Charities, and the American Cancer Society.
Establishing a limit on the amount donors can deduct from their taxes dissuades them from donating more to charity. This means that fewer homes will be built for low-income families and less research will be conducted to find a cure for various diseases, among other catastrophic consequences.
Unfortunately, since the economic downturn in 2008, charitable giving has declined by $25 billion. Federal and state budget cuts have further overburdened and diminished the capacity of nonprofits and disproportionately affected those least able to help themselves. Furthermore, as a result of the economic downturn, a greater number of individuals are financially at risk and desperately need the services that certain nonprofits provide.
For example, at a time when many Americans are struggling to achieve financial stability, organizations such as the Jewish Association Serving the Elderly (JASA) improve the lives of more than 53,000 elderly people each year. JASA has prepared and served over 1.3 million meals through its senior center and meals on wheels programs, provided quality home care to 1,200 frail homebound elders in Brooklyn and Queens, and trained some 653 elderly leaders to be activists for issues affecting seniors.
Today, more than ever, organizations like JASA need federal tax policy. With its help, they can continue to increase the amount of food available to Americans at risk of hunger and programs geared to empower vulnerable members of society.
The impact would be felt beyond just the individuals who receive benefits from nonprofits; employees of nonprofits would feel the strain as well. According to a 2012 Report by the Center for Civil Society Studies at Johns Hopkins University, nonprofit employment represented 10.1 percent of total employment in the United States in 2010, with total employees numbering 10.7 million. The nonprofit workforce is the third largest of all U.S. industries behind retail trade and manufacturing at 14.5 million and 11.5 million total employees, respectively. During the Great Recession (2007 to 2009), the nonprofit sector gained jobs at an average rate of 1.9 percent per year, while the private sector lost jobs at a rate of 3.7 percent per year.
The nonprofit sector is growing, and much of its growth can be attributed to economic challenges. Nonprofits have taken on greater responsibilities, particularly in the areas of health services (37% of nonprofit employment), education (15% of nonprofit employment) and social assistance (13% of nonprofit employment) during challenging times. As nonprofits expand the breadth of their work, they demonstrate significant job creation potential, highlighting the need to continue financial support for this sector. Nonprofits use their operating budgets to cover employees’ salaries and benefits. These budgets are funded through charitable donations. If the deduction is eliminated, many nonprofits will lose their ability to cover the costs of maintaining quality staff. Individuals will be stretched thin as their responsibilities increase, and nonprofits will struggle to accomplish their goals.
As the debate continues on the federal level, every individual should be conscious of the role that the charitable deduction serves. Is the amount of money the government might save worth the detrimental loss that many nonprofits would experience? The charitable deduction exists to help nonprofits provide valuable services to those in need. Without the financial support that these deductions make possible, how will nonprofits feed the hungry, house the homeless, and empower the needy?
We join Mr. Daroff and so many others in encouraging the leaders of U.S. nonprofits to be vigilant and aware that the debate will continue, probably for another six months. Contact your elected officials immediately to voice your stance on maintaining the charitable tax deduction. In addition, keep us advised about the pro-active steps you are taking on this critical issue.
Robert I. Evans, Managing Director, and Avrum D. Lapin, Director, are principals of The EHL Consulting Group, a fundraising consulting firm located in suburban Philadelphia. They are frequent contributors to eJewishPhilanthropy.com. The EHL Consulting Group is one of only 38 member firms of The Giving Institute. EHL Consulting works with dozens of nonprofits on fundraising, strategic planning, and nonprofit business practices and strategies. Learn more at ehlconsulting.com
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