Tag Archives: tax exempt

Charities Take A Hit

Yesterday was “giving Tuesday,” and inboxes everywhere were inundated with solicitations, prompting me to consider America’ charitable landscape.

I had recently come across a July, 2019 article published by Marketwatch (not exactly a Marxist publication), reporting the effects of the Republican tax bill on charitable giving. The lede tells the story:

New data on Americans’ tax returns adds to the growing body of evidence that charities are taking a hit as a result of Trump’s overhaul of the tax system.

Taxpayers have itemized $54 billion less in charitable contributions so far this tax season compared to the previous year, according to new IRS stats.

The tax act–signed by Trump in December of 2017– doubled the standard deduction. (As most readers of this blog are aware, the standard deduction is the amount taxpayers can  subtract from taxable income to reduce their tax bill, without having to itemize.) Taxpayers can still choose to itemize, but there’s less incentive to do that. Nonprofit scholars predicted at the time that a higher standard deduction would lead to fewer taxpayers itemizing, and that, in turn, would lead to fewer people making charitable donations in order to get a deduction.

Of course, the lack of reported donations doesn’t necessarily mean a lack of actual donations; it is highly likely that people accustomed to giving smaller amounts, or contributing to favorite causes, have continued doing so despite the lack of a tax incentive.

Studies do suggest, however, that charitable giving has taken a not-insubstantial hit. (1.7% doesn’t sound like much, but when the numbers are this big, it represents a significant chunk of change.)

Charities took in an estimated $427.71 billion overall in 2018. When adjusted for inflation, the figure represented a 1.7% decline in overall giving, according to Giving USA, an annual report on philanthropy released last month. The Giving USA estimates are made before final tax data is available, and its estimates are revised and updated as final tax return information about itemized deductions made by individuals, corporations, and estates becomes available.

The data on which the article is based is only for a part of the first year following the passage of the new tax law, and the long-term effects remain to be seen. But the dollar amount of private-sector support for charities is only one element of a charitable landscape that gets far less attention than the dollars involved.

For example, stories about charitable donations rarely point out that, in the United States, we depend upon nonprofit and charitable organizations to address what economists call “government failure.” (We learn about “market failure” in Econ 101. Less attention is paid to the concept of “government failure.”) In other words, Americans expect charity to respond to a number of social needs which in other countries are met by government programs.

A lot of what U.S. tax law considers “needs” sufficient to justify a tax exempt status are appropriately left to the private sector, but to the extent such needs are real and pressing and widely seen as collective responsibilities, a reduction in charitable giving can cause significant hardship.

Muddying the waters even further is the lack of a bright line between genuinely charitable organizations and profit-making ventures sufficiently “on the line” that they are able to obtain a 501 c 3. Is the hospital that pays its chief executive 400,000+ a year simply distributing what would otherwise be profit as salaries? Are donations to the school’s Little League team truly charitable contributions? What about the gift shop or car wash run by the church?

How elastic is our definition of “charity”?

One of these days (clearly not in my lifetime), American lawmakers are going to have to clarify some things: what are the social welfare services that government must provide? What privately-sponsored endeavors are truly charitable, and deserving of tax-exempt status, and which don’t justify the incentive?

Answering those questions is obviously less critical than ridding ourselves of the loopholes/subsidies that allow businesses like Amazon to avoid paying any tax at all on huge profits–but that doesn’t mean they are unimportant.