Bipartisanship is scarce today on Capitol Hill, as the party-line vote on the $1.9 trillion Covid-19 relief bill underscored. This makes the bipartisan sponsorship of the Universal Giving Pandemic Response and Recovery Act all the more notable, reflecting an emerging understanding that the vast majority of taxpayers are excluded from the tax incentives for charitable giving.
The proposed legislation would expand provisions passed in last year’s CARES Act that added a charitable tax deduction of up to $300 ($600 for couples filing jointly) for those who don’t itemize their deductions. Though we don’t yet know how much charitable giving that provision encouraged, it’s likely that it had at least some positive effect. The new bill goes much further, lifting the top deduction to $4,000 for single filers and $8,000 for joint filers. That may seem too generous, but it’s a necessary antidote to an unfortunate side effect of the Trump administration’s 2017 Tax Cuts and Jobs Act: the sharp drop in the number of taxpayers eligible for charitable deductions.
According to the Tax Foundation, prior to 2017, some 31 percent of taxpayers itemized, allowing them to use the charitable deduction. After passage of the Act, the number of itemizers fell to just 13.7 percent. There was much to applaud in the Trump tax reform: expanding the standard deduction vastly simplified income tax returns and reduced or eliminated tax incentives that deserved to be cut back, including the home-mortgage deduction and the deduction for state and local taxes, both of which accrued mainly to the affluent in blue states.
But by reducing incentives for charitable giving, the tax reform posed a threat to the ongoing revenue streams of front-line service providers, such as food banks, which have been hit hard by the pandemic. (By one estimate, a third of nonprofits are currently running short of funds.) Minnesota senator Amy Klobuchar, one of the new bill’s co-sponsors, has emphasized the need for near-term assistance: “Nonprofits are on the front lines of this crisis, but as demand for their services soars, many of these organizations are struggling to keep their doors open,” she said.
That’s true enough, but it doesn’t capture the larger significance of the bill. Limiting incentives for charitable giving to the wealthy runs counter to American traditions of broad-based philanthropy. The proposed bill would make a start toward re-democratizing charity—not only by providing financial incentives for it, but also by sending a normative message about its importance to society. Expanding the charitable deduction is an acknowledgment, by government, of the limits of government.
It also builds on another important trend that has helped democratize charitable giving: the sharp growth of donor-advised funds. The average value of these accounts, which offer a tax deduction for setting aside funds for future giving, is just $162,000. They resemble small foundations for the upper-middle class, managed by major financial firms. The number of such accounts have grown sharply, from 241,000 in 2014 to 873,000 in 2019. An enhanced charitable tax deduction will complement the growth of these individual charitable accounts.
The Universal Giving Act is far better-targeted than the idea proposed in the so-called Accelerate Charitable Giving plan, proposed by billionaire John Arnold, that would provide for a charitable tax credit—a stronger incentive than a deduction—but would set a high bar (2.5 percent of adjusted gross income) for taking advantage of it. Roger Colinvaux of Catholic University’s Columbus School of Law has offered a similarly misguided proposal. Both ideas risk discriminating against smaller donors.
In Democracy in America, Alexis de Tocqueville recognized that America’s ubiquitous grassroots “associations” ameliorated local problems and bound neighbors to one another. Volunteers are part of the lifeblood of these associations—but so are donations. The Universal Giving Act recognizes that reality.
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