Joseph Rosenberg, a researcher in the Urban Institute's new Tax Policy and Charities project and coauthor of “What's Been Happening to Charitable Giving Recently? A Look at the Data,” answers five questions about tax policy and the nonprofit sector.
January 31, 2012
1. What are the Tax Policy and Charities project's goals?
The project, funded by the Gates Foundation, aims to provide objective, nonpartisan research on the intersection of tax policy and the charitable sector. Part of the impetus for starting the project was that budget debates are increasingly involving proposals that could affect the charitable sector. A better understanding of the available options and their effects is important, both for policymakers and for the charities that might be affected.
By leveraging the Urban-Brookings Tax Policy Center's modeling capabilities and the Urban Institute's Center on Nonprofits and Philanthropy's expertise, we'll be able to translate our research into hard numbers people can understand. Our goal is to provide thorough and accessible information about the various tax policies affecting charities, make available the best estimates of potential changes being considered, and encourage and engage more academics and policymakers to improve and advance the policy debate.
2. Policymakers are considering changing the charitable deduction, which gives donors a tax incentive to donate. What would this mean for charities?
Donations from individuals make up the single largest source of giving for the nonprofit sector. The charitable deduction costs the federal government roughly $50 billion a year—that's one reason it plays a prominent role in the budget debate. There's substantial disagreement as to how important the charitable deduction is to giving, but any reduction in the subsidy would cause some reduction in donations. Charities are nervous because when you're talking about some $200 billion worth of contributions from individuals, even small changes could significantly affect their organizations—especially at a time when charities are increasingly replacing services that governments are no longer willing or able to provide.
"THE CHARITABLE DEDUCTION COSTS THE FEDERAL GOVERNMENT ROUGHLY $50 BILLION A YEAR—THAT’S ONE REASON IT PLAYS A PROMINENT ROLE IN THE BUDGET DEBATE.”
3. Which types of charities would be most affected and why?
Good question. This is one of the more interesting and often overlooked parts of the debate. It's one thing to estimate how overall giving will change, but what we really care about is the impact on the services that individual charities provide. It's important to relate the debate to specifics and figure out which types of charities and services may be put at risk or lost if the charitable deduction changes. Joe Cordes, an Urban Institute affiliated scholar, has found that the importance of private contributions varies greatly by charity. Now we're doing more work to better understand that variation.
We already know which types of charities rely heavily on donations and which ones don't. Hospitals and college and universities, for example, dominate the nonprofit sector, but donations aren't what keeps them going. Human service organizations, on the other hand, might really take a hit.
4. If the charitable deduction is changed, what would successful reform look like?
Changing the charitable deduction can be an opportunity. Policymakers should aim to reduce the amount of tax revenue lost to the deduction while minimizing the impact on charities. One possible way to do that: put a floor under the deduction so you limit the tax benefit of the initial contribution but preserve the incentive at the margin. Economists generally think that's how people respond to incentives—it's not about convincing people to donate in the first place, but about pushing them to donate more. A floor would reduce government's overall cost while preserving the tax incentive to give above the floor amount.
Another way is to improve enforcement. In some cases, a taxpayer may realize a large tax benefit but the charity may not get the same-size gain—say, with the value taxpayers deduct for donated clothes. In theory, stricter oversight would bring down the deduction's cost without harming charities and those they serve.
5. What other tax policies affecting charities are under consideration because of federal and state budget problems?
At the state and local level, the big one is the property tax exemption. Most nonprofits are exempt from paying property taxes if they own land or buildings. Some states and localities are now either directly challenging nonprofits' exempt status or asking nonprofits—particularly hospitals, educational institutions, and churches—to pay for city and state services in lieu of paying taxes.
At the federal level, even the overall income tax exemption for some nonprofits is being questioned. So, for example, heavily endowed higher education institutions and other fee-for-service nonprofits don't pay taxes, including on their investment income. Some lawmakers on the Hill are now asking why.
Also, we've seen a lot of changes to the federal estate tax in the past 10 years, with continued pushes to repeal it entirely. How such changes might affect people's decisions to donate late in life or leave charitable bequests at death is not well understood, but those donations are vital to the organizations that get them.