At the Senate Finance Committee Hearing, “Tax Reform Options: Incentives for Charitable Giving” on October 18, 2011, the ability for individual taxpayers to deduct charitable contributions was the major focus, as the search for additional sources of tax revenue and discussion of tax reform are getting serious in these tight economic times.
Over the years, there have been various proposals for changing the current system, as legislators try to balance the cost in lost tax revenue with the adverse impact of a change on giving to charities. The Joint Committee on Taxation prepared a paper outlining the current system and its history and discussing the potential impact of various proposals (expanding the charitable deduction to all taxpayers with a 1% floor; adding a floor but converting the tax deduction to a credit; capping itemized deductions, etc.). This is a must read for charities that receive a large proportion of their revenue from individual donors.
Iowa Senator Chuck Grassley, while supporting the current system of deductions at the hearing, also requested that the committee examine the types of organizations that benefit from the incentives for charitable giving, regardless of how the incentive is structured. His concern was that the deduction for donations of cash and publicly traded securities to public charities is now limited to 50% of adjusted gross income and 30% for other non-cash donations. These percentages drop to 30% and 20% if the donations are to a private foundation. So if an organization changes its status, donors will be able to increase their tax savings.
While this may sound obscure, Grassley’s research shows that since tax-exemption rules were significantly changed in 1969, there has been an explosion in asset-accumulating public charities that are not subject to pay-out requirements or the other private foundation rules, such as restrictions on self-dealing and excise taxes on investment income. He has included examples of subsidies provided to donors, in his October 17, 2011, letter to the Treasury and IRS. He states that this charitable loophole results in a big subsidy from taxpayers to a few already rich individuals and very little money for charities.
The discussion of the costs and benefits of the charitable deduction is not a new one, but Grassley’s call to examine what he calls “the increasingly blurred line between public charities and private foundations” adds another dimension to the ongoing debate. The need for federal revenue is clearly a major factor in driving tax reform, but it is certainly unclear what any reform might include at this time, and how it might impact charitable giving.