A proposal to extend the charitable deduction to all taxpayers, not just those who itemize, has a champion on Capitol Hill, but whether it can gain serious traction with lawmakers remains unclear as Congress attempts what President Trump calls a “once-in-a-generation” tax overhaul.
The cost of the proposal is one major hurdle: Some projections say the Treasury would lose more than $100 billion in the first decade. Another major concern is how the resource-strapped Internal Revenue Service would monitor its use and combat abuse.
“A universal charitable deduction will be an administrative nightmare,” said Les Lenkowsky, a nonprofit tax-policy expert who led the Corporation for National and Community Service under President George W. Bush.
Rep. Mark Walker, a North Carolina Republican, introduced the Universal Charitable Giving Act of 2017 last week and on Wednesday presented it personally to Rep. Kevin Brady, chairman of the House Ways and Means Committee, which writes tax legislation. His bill would allow all taxpayers to deduct charitable gifts from their taxable income regardless of whether they itemize, albeit with limits.
“America has been the most philanthropic country in the world for many years,” Mr. Walker said in a call with The Chronicle. “A lot of that is due to hard-working Americans who see a need in their communities. There should be a reward for those who sacrifice.”
Worried Charity Leaders
The bill appears to offer nonprofit leaders at least a partial palliative for one of their main worries over a tax plan developing in Congress. Republicans want to nearly double the standard deduction taxpayers can take without separately itemizing things like the charitable and mortgage-interest deductions.
Under existing law, taxpayers can take the charitable deduction only if they itemize. Right now, that is about 30 percent of taxpayers. With a higher standard deduction, that share would drop to about 5 percent and be concentrated among higher income Americans, according to House Republicans’ estimates.
Mr. Walker’s bill would make a charitable deduction available to taxpayers who do not otherwise itemize.
To limit the loss of tax revenue from his “universal charitable deduction,” Mr. Walker aims to cap the amount people can claim on top of the standard deduction. As written, the cap would equal one-third of the amount of the standard deduction. So if Congress passes a bill to nearly double the standard deduction to $12,000 for individuals and $24,000 for couples, Mr. Walker’s bill would cap the universal charitable deduction at $4,000 and $8,000, respectively. Gifts made by nonitemizers above those amounts could not be used to reduce taxable income.
There would be no change to the charitable deduction for the estimated 5 percent of taxpayers who would still itemize.
‘A Great Starting Point’
Charity leaders including Sandra Swirski, executive director of the Alliance for Charitable Reform, cite a study from the Indiana University’s Lilly Family School of Philanthropy that projects a $13.1 billion loss in charitable giving as a result of the increased standard deduction that Republicans are calling for.
Ms. Swirski said the legislation authored by Mr. Walker could help soften the blow.
“We’re delighted a bill was introduced,” she said. “It’s a great starting point.”
Still, she stopped short of endorsing the bill. That’s because she and others want a bill with a higher cap.
Brian Walsh, executive director of the Faith and Giving Coalition, a member of the Alliance for Charitable Reform said a low cap could starve nonprofits of needed cash.
“Charitable giving, instead of benefiting the individual, benefits society,” he said, adding that it would be shortsighted to look only at the lost tax revenue.
Still, Mr. Walsh called the bill a “welcome development.” Mr. Walker is not a member of the House Ways and Means Committee, which considers tax legislation. But as chairman of the Republican Study Committee, a group of conservative House members, and co-chairman of the Congressional Prayer Caucus, Mr. Walker will have a lot of sway with his Republican colleagues as they delve into a comprehensive tax bill, Mr. Walsh predicted.
He has no assurances that the bill will be included in the broader tax overhaul, but Mr. Walker told The Chronicle he’s “working, pushing, and prodding to get this thing in.”
He plans to present the bill to the 157-member the Republican Study Committee this week.
“I don’t want to put the cart in front of the horse, but things are trending in the right direction,” he said. “The reaction was very positive.”
Tough Sell
A study conducted last year by the Urban Institute found that absent any other changes in tax policy, extending the charitable deduction would cost $134 billion in lost federal revenue over 10 years. Researchers at the Lilly school peg its 10-year cost at $215 billion when combined with other potential tax changes. And researchers at the Tax Foundation, a policy-research organization, estimate it would cost $515 billion over the same time period, using slightly different assumptions on what a final tax measure would look like.
Although the projected revenue loss could make it harder to justify charitable tax breaks, the deduction is popular because it prods people to give, said Ryan Alexander, president of Taxpayers for Common Sense, a nonprofit federal-budget watchdog. Still, she said, the effect of tax policy on giving is overstated. Low- and middle-income taxpayers who mostly give small amounts to places of worship and their alma maters, she said, don’t give because of tax rules.
“They’re motivated by loyalty and community,” she said. “The tax deduction comes pretty low down on the list.”
Mr. Lenkowsky, who is professor emeritus of public affairs and philanthropic studies at Indiana University and a regular Chronicle contributor, said the doubling of the standard deduction would reduce the tax liability of many low- to middle-income people.
“Increasing the standard deduction may well be the most progressive element of this tax package,” Mr. Lenkowsky said. As such, nonprofit leaders who take to the Hill decrying that an increased standard deduction could hurt giving could appear to put nonprofits’ interests before those of average, hardworking American taxpayers.
“I think the risk to the nonprofit sector is that it looks like yet another lobby favoring its particular tax break,” Mr. Lenkowsky said.
Potential for Abuse
In addition, lawmakers, and those who enforce the laws, are going to question whether allowing all taxpayers to deduct charitable donations could create the potential for abuse, he said.
“Under this proposal, of course, 100 percent of households are now eligible to claim a tax deduction, which means the IRS is going to have to look at more tax returns that are claiming charitable deductions to be sure these are legitimate,” Mr. Lenkowsky said.
Issues with enforcement shouldn’t be a roadblock, said Allison Grayson, director of policy development and analysis at Independent Sector, a membership group of donors and nonprofits.
“If there is truly a concern about enforcement, we would love to engage policy makers on how better to equip existing oversight mechanisms,” she wrote in an email. “We are concerned that the IRS is underfunded, and we will continue to educate Congress on why they need more resources.”
With Congress under pressure to write a fair tax law, any provisions that reduce the burden for special groups will be scrutinized.
Charity advocates like Ms. Swirski of the Alliance for Charitable reform say their job selling the universal deduction is difficult because the arcane tax language involved makes it hard to develop a “bumper-sticker message.”
David Biemesderfer, CEO of the United Philanthropy Forum, agreed. By maintaining the charitable deduction, he said, lawmakers can easily believe they have “checked off the box” of charitable tax treatment in the tax code and move on to other issues. It is hard, he said, to succinctly explain to lawmakers what the unintended results of other changes in tax policy, like an increase in the standard deduction, would have on giving.
Mr. Biemesderfer adds, “It’s always easier to keep something that’s already in there than to commit to making a change that’s going to result in less revenue.”
Committee staff in the House and Senate have remained open to the universal deduction plan, according to Jamie Tucker, director of public-policy strategy at Independent Sector. But some are wary of giving anyone preferential treatment. Mr. Tucker says policy makers have told him that while the universal deduction might make sense, it wouldn’t look good.
He said they told him, “You guys will come out ahead in that scenario, and we can’t have industries come out ahead. Everyone needs to share equally in the pain.’”
