Tax Policy Time: Who Wants to Read That?!
Perhaps at root, some elected officials, bureaucrats, and armchair analysts consult with sociologists, economists, and mathematicians to consider how human behavior might be influenced in a desired manner—say for creating a coveted public good that otherwise might not materialize. For example:
- Want homeowners to buy more expensive, but energy-efficient appliances? Tax credit!
- Want drivers to get rid of their “gas guzzlers” and buy more expensive, but more environmentally-sound hybrid automobiles? Tax credit or “cash for clunkers!”
- Want first-time homebuyers to be able to buy that home and try to live the “American Dream?” Tax credit!
In sum, our federal and state tax codes are littered with “loopholes” and incentives in an attempt to alter behavior through intermittent reward, which otherwise (first and foremost) is often driven by personal financial cost. So what’s going on with arts philanthropy? And why is it important? It’s important because, “The fact is, non-profit organizations can’t achieve their mission unless somebody somewhere is supporting them financially.” That’s a pretty bold statement, but the data pans out: On average, individual giving makes up about a quarter of the revenue for a nonprofit arts organization. For nonprofit performing arts organizations, about 40 percent of financial support is derived from all forms of charitable giving, including foundation, corporate, and individual giving. Thus, even small fluctuations in contributed revenue can mean deficits, layoffs, suspended performances, less programming, and even closure for some organizations. In sum, revenue does limit an ability to fully achieve a mission. So why again are we talking taxes and how do they help? At the federal level, there are three main policy provisions that impact charitable giving, and all of them are up for potentially big changes:
1) The charitable tax deduction, which some filers have been able to take every year since 1917 (almost 100 years, are you kidding?),
2) The IRA charitable rollover provision, which has been on the books only since 2006, although allowed to lapse—and potentially permanently expire, and
3) Tax treatment of donated artwork, which you can read more about in the next blog submission!
Charitable Tax Deduction
According to Independent Sector, roughly one-third of all Americans itemize on their tax returns. That’s not a very high percentage. And yet, according to the Joint Committee on Taxation, charitable donations claimed on tax returns amount to about $175 billion annually in recent years. (Actual giving is much higher, about double, given the number of people who don’t claim a deduction.) Here too, courtesy of The Pew Charitable Trusts, you can view the claim rate state-by-state!
Tweaks and outright changes have been proposed for the deduction, including caps, floors, and other limitations—many in the name of raising government revenue. Numerous studies and research undertakings have tried to project the impact of these changes on giving, and despite differing projections, they all summarily conclude that taken alone, none of the proposed changes can increase giving. For example, the Urban Institute and Brookings Institution’s examination of the floor plan in the U.S. House of Representatives Ways & Means Committee’s comprehensive discussion draft concludes, “For all income groups, the cost of giving to charity would increase…” and a study by the American Enterprise Institute found that the proposed 28 percent cap on the charitable deduction could cause giving to decline by nearly $10 billion in the first year.
Given the serious proposal in the U.S. House, the parallel, robust working papers in the U.S. Senate, and the repeated budget proposals from the Obama Administration, changes to the charitable tax deduction are a very real consideration, although nothing is expected to change until at least 2015. It’s more of a “slow-burner,” but one that might soon boil—to significant impact for nonprofits of all shapes and sizes.
IRA Charitable Rollover
legislation in July that would stop the cycle and make this provision permanent, along with additional charitable tax provisions, like an enhanced deduction for donating food. That legislation remains to be considered in the U.S. Senate, although another targeted bill making just the IRA provision permanent is also pending in the U.S. Senate with sponsorship from six Senators from both parties. Final action could happen by the end of the year.Another main federal policy is the much newer IRA Charitable Rollover provision. This provision allows donors age 70 ½ and older to make tax-free charitable gifts directly from their Individual Retirement Accounts (IRAs), up to an annual ceiling of $100,000. Without the IRA Rollover provision, individuals who make charitable gifts from their retirement accounts must withdraw funds and treat them as taxable income, thus reducing the amount available for donation to charity. The provision has expired and been reinstated multiple times—it most recently expired on December 31, 2013, but the U.S. House passed
Especially between now and the end of the year when the fate of the IRA Charitable Rollover has never been closer to permanent policy, don’t be shy about contacting your representatives. After all, it is their job to represent you. Comment and share below the responses you get from your representatives on whether they will support all of these charitable tax provisions and what it means to you, your work, and your community, and let’s all help hold them to it!