Universal Charitable Deduction Gains Influential Support

There’s been talk for many years about expanding the charitable deduction. But since the enactment of the Tax Cuts and Jobs Act of 2017 (TCJA), interest has picked up in expanding it beyond those taxpayers who itemize deductions. This jump in support – or at least a willingness to consider such a major change – is in large part because the TCJA unexpectedly broadened the standard deduction. Now, many former itemizers are ineligible for that choice. 

In the spring of 2019, the Democratic members of the influential Joint Economic Committee of Congress issued a report proposing significant changes to the TCJA including on this issue.  More significantly, though, in November 2019, the GOP members issued their own formal report on the matter: Reforming the Charitable Deduction.

Charitable Deduction Reform Needed

After the 2017 tax act was signed into law, many experts and observers feared that taxpayers who suddenly fell out of the itemizer category might cut down on charitable giving. Early anecdotal and raw data reports reinforced this concern. By the middle of 2019, the Internal Revenue Service issued hard figures for 2018; the prediction of a decline in individual giving was officially confirmed. Additional data for the first two quarters of 2019 showed continuation of the trend.

The suggested fixes for the charitable deduction range from simply restoring the status quo before the TCJA all the way to authorizing a charitable deduction for taxpayers regardless of itemizer status or to enacting a charitable tax credit. 

  Input from Congress

The Joint Economic Committee (JEC) is a “bipartisan, bicameral body” with ten members each from the Senate and House of Representatives. It dates back to the Employment Act of 1946 which included two advisory panels: the President’s Council of Economic Advisers (CEA) and this Joint Economic Committee. Their primary tasks are to review economic conditions and to recommend improvements in economic policy.” The chair duties of the Joint Economic Committee alternate between the Senate and the House of Representatives. The current chair is Senator Mike Lee (R-UT). The vice-chair is New York Democratic Representative Carolyn Maloney. 

In April 2019, the Democratic members of the JEC issued their 9-page report titled The Economic Impact on Charities of the 2017 Tax Act. This document points out which provisions they see as  the most troublesome for the nonprofit sector. It also explains concurrently filed Democratic-sponsored legislation in the House that proposes to address some of the worst TCJA provisions including the new rules for unrelated business income. That legislation omits any specific remedies for the standard-deduction issue because the Democrats prefer to address that in a free-standing bill. But, in their Report, they describe a “suggested solution”: namely, amending the tax law to include at least some limited amount of above-the-line deductions for charity. That change would allow all taxpayers regardless of itemizer status to claim charitable deductions. 

  Universal Charitable Deduction Urged

On November 3, 2019, Senator Lee, on behalf of the Republican members of the Joint Economic Committee, issued the 18-page document titled Reforming the Charitable DeductionIn this report, the GOP legislators point to hard data and observations indicating problematic trends and developments in charitable giving in the United States. 

First, the report points to the research that “confirms a decline in charitable deductions since the TCJA broadened the standard deduction range.” This decrease had begun “many years before the 2017 tax law took effect” but has been exacerbated by the abrupt contraction in the number of taxpayers allowed to itemize deductions. This GOP report also notes a related, more long-term, development: Although total giving is up, the percent of individual Americans making charitable donations has dropped about ten percentage points from 2000 to 2014 and continues this downward trend to the present. More money is “… coming from a shrinking share of the population.” 

Second, it mentions the hard numbers indicating that “giving patterns differ greatly depending on the income level of the giver.” It cites a major university study that, while from a decade ago, nevertheless still holds true. A majority of donations from households with incomes below $200,000 go to religious institutions, followed in second place to organizations that “help meeting basic needs.” In sharp contrast, the highest-income taxpayers give the most to arts, education, and healthcare institutions. As fewer individual taxpayers can take tax deductions for donations, this disparity in the types of charities supported will only grow deeper.   

Third, the GOP report notes that the United States is experiencing “long-term decline in its associational life … that is impacting giving and most forms of charitable interaction.” These JEC  members believe that “there should be policy reform so that less of the charitable giving by Americans is subject to taxation. Doing so would be more consistent with the principle that people should not be taxed on money they give away.” 

The suggested fix by the JEC Republican members is “replacing the current charitable deduction with either an ‘above-the-line’ charitable tax deduction or a charitable tax credit that applies equally to all taxpayers.” They assert that “either policy reform could be expected to increase US charitable contributions by over $20 billion a year.”

  Conclusion 

This new policy statement is an important step forward in the ongoing debate and discussion about the future of charitable giving in the United States. 

In The Charitable Deduction: Then and Now (November 14, 2019), we discussed two other recent entries in this national conversation about the charitable deduction. First is Dr. Nicolas J. Duquette’s in-depth study, Founders’ Fortunes and Philanthropy: A History of the U.S. Charitable-Contribution Deduction (August 27, 2019). Second, is Charitable Tax Reform for the 21st Century (September 16, 2019) by noted tax-exemption scholars, Professors Ray Madoff and Roger Colinvaux, who support major changes. “They argue that the current – generous – tax incentives for charitable giving are ‘woefully out of step with their purpose and the realities of charitable fundraising today, resulting in a system that is incoherent, ineffective, and on the verge of failure.’”

Since then, there has been another development. In December 2019. Representative Mark Walker (R-NC) formally introduced new legislation, The Universal Charitable Giving Act, with broad support including from the nonprofit sector. 

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