According to the Joint Committee on Taxation, Congress spent about $1.5 billion in the Coronavirus Aid, Relief, and Economic Security (CARES) Act to create a one-year charitable deduction of $300 for the 90 percent of taxpayers who claim the standard deduction.
Unfortunately, little of this $1.5 billion will benefit the recipients of charitable services. At best, they may get $100 million or so in extra services. The rest of the money simply reduced taxes for those non-itemizers who will claim the deduction without significantly changing their overall amount of giving.
This was a missed opportunity. With a better designed tax subsidy, Congress could have increased the incentive to give to charity. Or, it could simply have given $1.5 billion directly to charities, with a requirement that they spend it on beneficiaries.
Don’t get me wrong. In the grand scheme of things, this is small potatoes in a $2 trillion package. My colleague, Howard Gleckman, has outlined the failures and successes of this and other charitable provisions of the CARES Act.
Still, the $300 deduction sets a poor precedent, especially for the more universal deduction at a much higher foregone revenue cost that many charities have been pursuing. This type of proposal very likely will be a topic of Congressional attention in the near future, at least when Congress addresses the post-2025 expiration of the 2017 individual reforms that led to a significant cut back in the value of the charitable deduction.
The CARES Act version has several flaws: First, it provides deductions for what people do anyway. Second, the law creates no way for the IRS to track newly deductible gifts, and cheaters will be among the biggest winners. Finally, it caps at a very low level the amount of giving eligible for the new subsidy. The Tax Policy Center estimates indicate that over 90 percent of both itemizing and nonitemizing donors make annual contributions in excess of $300. Thus, most donors get no extra incentive for any extra gifts because their deduction is limited to less than their normal annual giving without a tax deduction.
By extension, those who benefit from the work of non-profits could lose out of tens of billions of dollars of services annually, and hundreds of billions over a decade, if Congress builds on the CARES Act in creating a more universal deduction. This is because reduced federal revenues will likely mean less federal spending directed through non-profits.
There are better designs.
Instead of subsidizing the first dollars of giving, Congress could concentrate its rewards on the last dollars contributed. It could set a contribution floor at, say, 1 percent or 2 percent of AGI, below which donors would get no subsidy. Excluding those who do not give, the average level of giving for donors is about 3 percent. So this approach concentrates the tax incentive on taxpayers who give an average or greater share of their income to charity. At the same time, Congress could cap deductions for donations at a high level, such as the 50 percent of adjusted gross income (AGI), the long-time limit that was applied to itemizers (the CARES Act raised the cap to 100 percent of AGI for 2020).
The signals Congress sends are very important. When it comes to charitable giving, the most effective message is: You should donate more than you traditionally have been giving—whether or not you itemize. The symbolism of a subsidy made universally available to all taxpayers giving away more than a small amount may increase charitable giving even more than implied by the financial reward provided by the tax incentive.
My simple suggestion is to put the beneficiaries of non-profits first. Members of Congress should ask the Joint Committee on Taxation to estimate the amount of giving that various options could generate at each of several alternative revenue costs. This additional analysis would allow Congress to focus on the efficiency of the tax incentives under consideration. Beyond examining alternative floors and caps, as noted above, Congress should include other options, such as instituting a better information reporting system that, by reducing revenue losses to those who cheat on their tax forms, would add to the revenues that could be devoted to an enhanced charitable incentive. Allowing deductions for the previous tax year up to the time of filing, a provision that once passed the House of Representatives, would also increase giving substantially relative to any revenue cost.
Once Congress decides how much it wants to spend in terms of foregone revenue, it should then choose the option that maximizes the benefits for those whom charities aim to help, rather than an option that promotes the self-interest of either taxpayers or the non-profits themselves.