Time to Fix the Charitable Deduction

July 18, 2013

Senate Finance Committee chairman Max Baucus and ranking minority member Orrin Hatch have issued a bracing and unusual challenge to their colleagues: make the essential case for any and all tax breaks -- don't assume that the home mortgage interest deduction and state and local tax deductions will continue indefinitely, says Howard Husock, vice president for policy research at the Manhattan Institute.

We can expect defenders of the charitable deduction to base their defense on the many and varied good causes that benefit from the annual $300-plus billion in charitable donations, estimated by the Office of Management and Budget to divert from the Treasury some $50 billion for fiscal 2013.

  • The case for the charitable deduction, however, should go beyond specific good causes.
  • It is, at bottom, an acknowledgment of the limits of what government can foresee and do well.
  • But it's also a case that is increasingly hard to make, because of how the world of charitable nonprofits has changed over the past generation.

The Baucus/Hatch challenge should also become an occasion for those in the nonprofit world to reflect on how they do business today -- and just how intertwined they've become with government.

  • The Urban Institute has estimated that, as of 2010, governments at all levels directed more than $100 billion to some 33,000 human-service organizations.
  • In other words, the so-called independent sector is not so independent anymore.

Quite simply, it is far more difficult to defend the charitable tax break when so many nonprofit groups rely on government funding. They get both tax money and a tax break for their donors.

Far better to reserve the charitable tax deduction for those groups that do not rely on government -- who get, say, no more than a quarter of their income, at most, from government contracts. That way, philanthropic dollars can be used to help those pursuing new ideas through unconventional approaches.

Source: Howard Husock, "Time to Fix the Charitable Deduction," Politico, July 12, 2013.

 

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