In a previous post I wrote about a New York Times story detailing efforts that some in the federal government are exerting to help close the federal budget gap by changing the tax treatment of charitable giving. Â Beyond the revenue-raising potential of any curtailment of the charitable deduction, some policymakers are advocating for changes in the charitable deduction within the framework of tax reform, with the aim of correcting perceived inequities in the ability of taxpayers at varying income levels (both low and high income households) to take advantage of preferential tax treatments, including the charitable deduction.
Now, the Congressional Budget Office (CBO) has released a study, â€œOptions for Changing the Tax Treatment of Charitable Giving,â€ that reports on that agencyâ€™s financial modeling of eleven different options for changes in the tax treatment of charitable contributions. The report is not light reading, so bear with me as I summarize.
The eleven options range from retaining the current deduction for itemizers but adding a floor (i.e. allowing an itemizer to deduct, for example, charitable giving over $500 or over a percentage of Adjusted Gross Income), to allowing all taxpayers to deduct without a floor, to replacing the deduction with a non-refundable tax credit with or without a floor (two different bases for the tax credit are calculated).Â For each of the eleven options, the CBO calculates what the resulting increase (or decrease) in charitable giving is most likely to be and what the increase (or decrease) in tax collection is likely to be.Â Obviously, the search is for the option that predicts the lowest drop in charitable giving and the highest increase in tax collection. Â Or, for those approaching the subject from the perspective of tax reform, the search is for the option that allows the widest potential spectrum of taxpayers — both low and high income — to benefit equally from preferential treatment of their charitable gifts while not increasing (and preferably decreasing) the cost to government.
The CBO report also analyzes the broad categories of recipients of charitable giving as a percentage of the giving from each household, by income level (broad categories such as religious organizations, health, education, arts). Â The data show that giving to arts organizations increases as a percentage of an individual’s total charitable giving as income rises. Â Households with annual incomes under $100,000 give about one percent of their total donations to the arts, while those over $200,000 give 15 percent to the arts. Â In comparing the applicability of the deduction itself as most favorable to wealthy individuals who itemize their returns, and by showing that arts giving increases as household income increases, the report implies — but never overtly states — that arts organizations benefit from the inequitable tax treatment of high income households.
In this policy environment, arts organizations will need to build an even stronger case that our missions and the public value we create benefit a broad spectrum of the community and not merely wealthy individuals. Â Beyond arguing the intrinsic value of art itself we will need to articulate our public value with fresh urgency. Â Fortunately, there are many stellar examples of cultural institutions with deeply accessible programming, significant education efforts for both children and adults, and other initiatives aimed to enrich community life. Â It is more important than ever that these efforts are understood by policymakers. Â In the music field, the League of American Orchestras is engaging practitioners and policymakers in a broad advocacy discussion about how we provide public value and how that value can be understood and communicated.
The CBO report was issued in May and will help inform the debate over charitable giving that has been simmering more steadily over the past year or so. Â While there is no legislation yet, advocates from across the spectrum of non-profit organizations are studying the CBO report and discussing what position will best protect the incentives the tax code has provided for nearly 100 years for individual charitable giving.Â (The report provides a very brief history of the deductibility of charitable gifts, an incentive in place since 1917, and explains changes in the tax treatment of charitable giving during the Twentieth Century.)
However one may view the efficacy or equity of the charitable deduction or any of the other myriad incentives and disincentives built into our complex tax code, for me there are three takeaways from the CBO report.Â The first is that there is clearly a gathering of forces determined to change the tax treatment of charitable gifts.Â There is momentum in a number of areas of government around this, and given the federal budget deficit, policymakers are looking for money wherever they can find it.Â The second is that while the CBO offers a detailed analysis of the reliability of its predictions regarding the future behavior of taxpayers under a variety of tax policy options, no one really knows how changes in deductibility will affect our sector. Â It could be a wild ride. Â We could wait for a more substantive body of research to inform policymakersâ€™ decisions, but that may not happen before changes are made.Â So takeaway number three: weâ€™d best prepare ourselves for both the debate and for the coming change.