With the impending end of the calendar year, our inboxes are predictably packed with entreaties from all sorts of nonprofit organizations — from the Salvation Army to public radio — for financial support. Implicit in their appeals is the fact that, to qualify for a 2022 charitable tax deduction, such contributions must be made by Dec. 31.
Providing support for all sorts of civil society organizations — the non-government groups that knit our society together — are all to the good. But the reality is that few Americans will actually see a tax break anymore for writing such a check. It’s an unfortunate reality that the next Congress should address.
The lack of a charitable giving tax incentive for most households is collateral damage from an overall set of positive changes in the Tax Cut and Jobs Act (TCJA) of 2017. But in addition to reductions in marginal rates and corporate taxes, which helped boost the economy, the TCJA sharply increased the so-called standard deduction. That’s the reduction in adjusted gross income that all income tax filers receive, even if they don’t itemize specific deductions, such as those for mortgage interest, state and local taxes or charitable giving.
Tax code simplicity is a virtue — and the tax law change has made it possible for 90 percent of Americans who file income tax returns to do so without worrying about itemizing, with all its complications and tax schedules.
But it also means that only those with the highest incomes and the most deductions can take advantage of the charitable tax deduction, one of the few remaining “loopholes” in the personal tax code. So it is that charitable giving has become a luxury good.
This is an unhealthy state of affairs. It not only means that most Americans are no longer encouraged to engage in one of the nation’s signature acts — charity. It also means that the tax code will reward the charitable tastes and preferences of only the affluent.
The implications are logically substantial. The most affluent are clustered in a few states — New York, Connecticut, California and Texas among them. In recent years, they have moved toward the progressive wing of the Democratic Party; thus, the tax code risks providing disproportionate succor to left-leaning advocacy groups.
What’s more, because a great deal of charitable giving focuses on causes and services close to home, restricting the tax incentive to the affluent risks channeling more financial resources to affluent neighborhoods and well-endowed universities, from which the affluent may have graduated. The storefront church may be more important than the grand cathedral — and will likely need financial help more.
All this lays the foundation for a further disparity between rich and poor, at a time when lower-income neighborhoods need the safety net of a healthy social fabric.
The struggle against crime, drug abuse and deaths of despair need well-financed churches and social services in non-affluent zip codes.
As a rule, Washington is not the best place to take steps to encourage healthy, local civil society. But a tax code change could help. Crucially, Congress should restore the COVID-era (2020 and 2021) “above the line” tax deduction that reduced the taxable income by up to $600 even for those who did not itemize. Another possible innovation: increase the credit for contributions made to organizations in low-income zip codes.
Such changes, to be sure, could reduce tax revenues — but not significantly and not in comparison to the potential benefits. An American Enterprise Institute report by economists Alex Brill and Derrick Choe found that “replacing the current charitable deduction with an above-the-line deduction would increase giving by $21.5 billion and reduce revenue by $25.8 billion.”
A tax credit — which would reduce the actual tax liability, rather than merely reducing taxable income — would reduce revenue further but lead to even more charitable giving. A 2020 paper by Patrick Rooney and three co-authors at the Lilly School of Philanthropy, Indiana University, found that a 25 percent tax credit for charitable giving would increase such giving by $37 billion, while reducing tax revenue by $33 billion.
For those of us who care about the health of our so-called independent sector, the benefits outweigh the costs. The accountability and local focus of so many charitably-supported groups provide advantages that Washington-based programs can’t match.
Neither civil society nor charitable giving should be confined to the affluent. Our tax code should not encourage them to become luxury goods.
Howard Husock is a senior fellow at the American Enterprise Institute.