the end of the calendar year approaches, our inboxes are, as expected, full of requests from nonprofit organizations of all types — from the Salvation Army to public radio — for financial support. Their appeals implicitly include the fact that such contributions must be made by December 31 to be eligible for a 2022 charitable tax deduction.
Supporting all types of civil society organizations — the non-governmental groups that hold our society together — is beneficial. The reality, however, is that only a few Americans will actually take advantage of a tax break for writing such a check. It is an unfortunate reality that the next Congress should address.
The lack of charitable tax incentives for most households is collateral damage, stemming from a number of positive changes in the Tax Cut and Jobs Act (TCJA) of 2017. However, in addition to reducing marginal rates and corporate taxes, which helped stimulate the economy, the TCJA sharply increased the so-called standard deduction. That’s the reduction in adjusted gross income that all income tax payers receive, even if they don’t report specific deductions, such as for mortgage interest, state and local taxes, or charitable donations.
Tax code simplicity is a virtue — and the change in tax law has allowed 90 percent of Americans filing income tax returns to do so without having to worry about the breakdown, with all its complications and tax plans.
But this also means that only those with the highest incomes and the most deductions can use the tax deduction for charitable purposes, one of the few remaining “loopholes” in personal tax legislation. Charitable donations have therefore become a luxury item.
It’s an unhealthy condition. That doesn’t just mean that most Americans are no longer encouraged to get involved in one of the country’s most important laws — charity. This also means that the tax code rewards the charitable tastes and preferences of only the wealthy.
The implications are, of course, significant. The wealthiest are grouped together in a few states, including New York, Connecticut, California, and Texas. In recent years, they have turned their attention to the progressive wing of the Democratic Party. There is therefore a risk that the tax code will provide a disproportionate amount of support to left-leaning interest groups.
In addition, much of the donations to charities and services are concentrated close to home, which allows tax incentives to be limited to the wealthy, and that more financial resources are directed to affluent neighborhoods and well-equipped universities where the wealthy may have graduated. The window church may be more important than the grand cathedral — and will likely need more financial help.
All of this forms the basis for further inequality between rich and poor at a time when lower-income districts need the safety net of a healthy social fabric.
Fighting crime, substance abuse and death from despair requires well-funded churches and social services in non-affluent zip codes.
As a rule, Washington isn’t the best place to take action to promote healthy local civil society. But a change in tax legislation could help. Crucially, Congress should reinstate the “over the line” tax deduction from the COVID era (2020 and 2021), which reduced taxable income by up to $600 even for those who did not provide details. Another possible innovation: Increasing credit for contributions to organizations in low-income zip codes.
Such changes could reduce tax revenues — but not significantly and not compared to the potential benefits. A report from the American Enterprise Institute by economists Alex Brill and Derrick Choe stated that “replacing the current charitable deduction with an additional deduction would increase donations by $21.5 billion and reduce revenue by $25.8 billion.”
A tax credit — which would reduce the actual tax liability rather than simply reducing taxable income — would further reduce revenue but would result in even more donations to charity. A 2020 article by Patrick Rooney and three co-authors from Indiana University’s Lilly School of Philanthropy stated that a 25 percent charitable tax credit would increase those donations by $37 billion while reducing tax revenue by $33 billion.
For those of us who care about the health of our so-called independent sector, the benefits outweigh the costs. The accountability and local focus of so many nonprofit groups provide benefits that Washington-based programs can’t match.
Neither civil society nor charitable donations should be limited to the wealthy. Our tax legislation shouldn’t encourage them to become luxury goods.
Howard Husock ist Senior Fellow am American Enterprise Institute.