April 07, 2013

I Give Millions to Charities. Here’s Why It’s Unwise to Limit Tax Breaks

Courtesy of the Center for Arts Education

Without the charitable deduction, groups like the Center for Arts Education, which has revolutionized arts education in New York City Public Schools, would never get a start.

I have been fortunate enough to have given away millions of dollars to charity over the years. And I’ve never shied away from asking my peers to do the same. 

Unfortunately, that may all change if Congress or the Obama administration reduces or caps the charitable deduction. 

It’s imperative that more independent voices come forward to protest any limits on the value of deduction as soon as possible. We need to keep public pressure on Washington and educate these leaders that capping or reducing the charitable deduction will not hurt millionaires nearly as much as it will devastate charities and the communities served by generous charitable donations.

Along with more than 40 other witnesses, I went to Washington in February to warn the House Ways and Means Committee about the devastating effect reducing the value of the charitable deduction would have on the unique partnership that exists between nonprofits and government­—which does so much to make our communities healthier and stronger. 

I was the only witness unaffiliated with a charitable organization. I appeared as a donor who has financially supported numerous nonprofit institutions and served as a board chairman, trustee, and volunteer.

It is my experience that when I approach others asking them to donate large sums, one of the first things they ask me is “Is it a 501(c)(3) and is it tax-deductible?” 

These are good people who are looking for a worthy cause, but I still need to offer them the option of getting a tax deduction to close the deal. 

Without the deduction, nonprofits that help maintain our culture, our heritage, our education system, our hospitals, our scientific research, and our religious institutions are going to get the short end. This will be disastrous for the institutions that serve communities and are so vital in our society in helping the poor, the homeless, the mentally ill, and at-risk children. 

Nonprofits like Harvard University and the Metropolitan Museum of Art may not face nearly as hard a time as new nonprofits—the groups that are taking risks to develop innovative approaches to solving social problems and fighting disease.

For instance, since 1993, the Prostate Cancer Foundation has raised more than $520-million to finance groundbreaking research that has led to as many as 40 percent fewer U.S. deaths from prostate cancer. The charity’s research is exploratory, investigative, and high risk. 

But if any of the 114 researchers it has supported came up with a cure or treatment for cancer—or stumbled on a cure for muscular dystrophy or Alzheimer’s disease—that would put billions of dollars into our economy and keep our position as leaders in the world in medical research and science. 

Or take the Center for Arts Education, which was born out of the philanthropist Laurie Tisch-Sussman’s vision of ensuring that every child in every New York City public school has access to an education that includes the arts.

This has led to a renaissance of arts education in the public schools, which currently have an annual arts budget of $65.7-million.

Another example is the 58 Fisher Houses, providing “a home away from home” for families of wounded soldiers receiving medical care at major military and Veterans Administration medical centers. Since 1990, more than 160,000 families have been served and saved $200-million in lodging costs.

Without a tax deduction, new groups like this would never get a start. People might be willing to keep giving to well-established institutions without a tax break, but they are not going to take the risk of supporting unproven programs.

It’s an especially bad time to be focusing on cuts to the value of deductions at a time when government is making deep reductions in spending. Because Congress failed to act to head off automatic spending cuts known as the sequester, every federal agency is now reducing aid—and that adds to the demands placed on nonprofits.

For example, some National Institutes of Health researchers who had already been approved for government grants are now not getting any money.

That means private donors will need to increase their contributions to nonprofits if we expect to make major breakthroughs in fighting disease. But how will that happen if Congress also passes a major reduction in incentives to give by decreasing the value of charitable deductions?

If policy makers start tinkering with donations, we’ll be shorting charitable institutions at the government end and at the same time throwing obstacles in their way when they turn elsewhere for the help they need to maintain research budgets and essential services. This is a recipe for disaster.

Perhaps if a compromise is needed, Congress could limit tax deductions on contributions Americans make to charitable organizations outside the United States .

If people want to save Venice, restore Versailles, or help eradicate diseases in Africa by making gifts to “friends of” groups with American charity status, those are noble endeavors worthy of support, but let them spend on that entirely from their own pocket with no federal tax subsidy.

Limits on deductions to American groups could mean that museums won’t be able to expand their community outreach, new hospital wings and research centers won’t be built, new professors, teachers, and physicians won’t be hired. 

And for every building that isn’t built, every expansion that is put on hold, every research project that is abandoned, America will face a corresponding loss of momentum and a sizable ripple effect in the economy.

The construction workers who won’t be putting up the new building, the carpet-layers who won’t be putting in the new carpet, the food-service workers who won’t be providing additional meals, the computer companies that won’t be setting up new systems. Those lost jobs will mean fewer houses built and purchased and loss of expansion and revenue everywhere.

Millions more jobs could be lost in institutions themselves, and numerous nonprofits could be forced to close.

A personal experience illustrates not only the unique approach to charitable giving in the U.S. but also the potential danger of fixing something that just isn’t broken. 

In the late 1970s, I heard from Sir Joseph Lockwood, then the chairman of the British entertainment company EMI, about his difficulties in raising money to rehabilitate the Royal Opera and Ballet. He was chairman of the reconstruction fund, and the opera and ballet had fallen into such disrepair that the performers couldn’t dance on the stage, and the few dressing rooms backstage were uninhabitable. 

It took him and his colleagues many years to raise the money for this leading British cultural institution, in part because there were no tax deductions but also because government typically could be counted on to support nonprofits. 

The wealthy potential British donors responded to urgent pleas for help by saying “I give enough money to the government; let them take care of it.”

That’s what could happen to us. The burden of supporting these charitable organizations will come right back to the government.

That’s just not how we want things to be. The United States is the only developed country whose cultural, educational, scientific, and religious institutions are supported not primarily by the federal government but by philanthropic largess.

That was why the tax deduction for charitable contributions was created in the first place—very soon after the income tax itself was enacted early in the 20th century. And it worked brilliantly.

It’s not that I object to paying my fair share. People like me can certainly afford to do that, and I think it’s the right thing to do, especially if that’s what it takes to keep our economy and country sound.

But there are better ways to go about it than abandoning a system that has worked so well for us for almost 100 years.

We don’t want to end up like the Royal Opera and Ballet, begging for government to fix the dance floor.

Earle I. Mack, a businessman, was ambassador to Finland in 2004 and 2005 and chaired the New York Council of the Arts.