The Not-So-Charitable Deduction?

October 28, 2005

The New York Times reports that charitable giving has surged in the wake of a provision in the Hurricane Katrina relief bill expanding the deductibility for gifts:

A little-noted provision in the tax relief package to aid victims of Hurricane Katrina is shaping up as a windfall for charity and a drain on government coffers.

It allows donors who make cash gifts to almost any charity by the end of this year to deduct an amount equal to virtually 100 percent of their adjusted gross incomes, double the normal limit of 50 percent of income. The tantalizing prospect has set off a financial scramble among some wealthy donors and charities vying for their dollars.

“I just keep thinking there’s got to be a catch, they can’t really be doing this,” said C. Kemmons Wilson Jr., a Memphis businessman whose father was the founder of Holiday Inns Inc.

Mr. Wilson said that he and his siblings gave away several million dollars a year and that the amount could double this year because of the provision. “How many sales does the government have?” he said. “This is a big sale, and you bet I’m going to go.”

In reality, expanded giving incentives are likely to change the timing of gifts more than the amount. But the real question is: Is a federal tax incentive for charitable giving good tax policy to begin with?

It’s popular across the political spectrum, but the economic justification for the charitable deduction is surprisingly uneasy.

For one, its benefits are highly regressive. Second, by shifting part of the cost of private giving onto others, it forces some to subsidize gifts to nonprofits with goals opposite their deeply held beliefs—for example, gifts to pro-choice organizations end up being subsidized by taxpayers with pro-life views, etc.

Finally, the data on 501(c)(3) charities shows many are charitable in name only, receiving most support from local, state and federal government grants rather than charitable gifts.

Here’s a table of ten of the largest U.S. charities, showing the amount of government support they received as a percentage of revenue in 2004:

Total Revenue ($ millions) Government Support ($ millions) Government Support as a Percentage of Total Revenue
Mercy Corps International $116 $99 85%
Fred Hutchinson Cancer Research Center $240 $189 79%
Institute of International Education $158 $117 74%
Catholic Relief Services $500 $355 71%
United Cerebral Palsy Associations $310 $206 66%
National Gallery of Art $141 $92 66%
CARE USA $523 $332 63%
Catholic Charities USA $2,859 $1,757 61%
International Rescue Committee $153 $90 59%
Save the Children Fund, Inc. $241 $135 56%

Source: NonProfit Times 100 Survey, 2004.

In what sense is an organization that receives 85 percent of its budget from government grants a charity that’s subject to market failure without a tax subsidy? It’s not obvious.


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