The tax bill recently passed by Congress and signed by President Bush was supposed to include increased incentives for charitable giving, but the final bill did just the opposite. President Bush stated often, even as recently as mid-May, that extension of a charitable deduction to non-itemizers was a central element of his tax plan. When serious negotiations began, however, charitable incentives disappeared as a priority and were nowhere to be found in the final bill.
What the final bill did include was a repeal (at least for one year) of the estate tax, which should cost charities about $6 billion per year in bequests if it is made permanent. Studies of charitable giving show that while people do not give to charity solely for tax reasons, tax incentives do affect the amount and manner of giving. A PriceWaterhouseCoopers study, based on giving patterns when non-itemizers could take a charitable deduction for one year in 1986, concluded that a permanent non-itemizer deduction would generate about $14 billion per year in additional contributions. The tax benefit would also extend to many more people, most of whom probably need it more than those who will benefit from estate tax repeal.
The non-itemizer deduction is still a part of a House bill tied to Charitable Choice, a proposal to increase the eligibility of faith-based organizations to receive federal funds. This bill is struggling to overcome constitutional hurdles, however, along with concerns about the possible effect of federal dollars on churches and other faith-based organizations themselves. In any case, with Democrats now in the majority in the Senate, another tax bill seems unlikely. Any charitable incentives, such as the non-itemizer deduction or a proposal to allow individual retirement account rollovers for charitable contributions, would now need to find an offset to the cost. These incentives may still become law, but they face a much rockier path than if they had been part of the tax bill.
The Charitable Choice measure itself is not as much of a boon even to faith-based charities as it would appear, since there are no new funds for charitable purposes within it. It only changes some eligibility criteria for existing programs, possibly shifting some funds to faith-based organizations away from other current providers. Many churches and ministries are scrambling to position themselves for new money that isn’t really there.
New program funds of any type will be difficult to come by after a tax cut which will turn out to cost much more than the stated amount of $1.35 trillion, based on a surplus which may or may not materialize as projected.
Tricky phase-outs and phase-ins were used to make the cuts appear smaller than they will ultimately have to be. No tricks were used to squeeze charitable giving incentives into the bill, however.
Some churches and charities are hoping that a portion of the famous $300 tax rebates will come their way, and perhaps this will occur. A group called Third Millennium is trying to promote this idea nationally with its www.donaterebate.org site, and other groups are likely to jump on the idea.
Any benefit to charities will be short-lived, however. In the longer run, charities are likely to face tighter resources from both government and private giving as a result of the tax bill. Ongoing cuts in tax rates are not likely to increase charitable contributions, as they have not done so historically, and they actually make charitable deductions worth a little less.
Overall prosperity does help charitable giving, and if the tax cut could be counted on to spur economic growth, this would benefit charities also. Yet if the tax bill causes budget surpluses to turn back into annual deficits, without ever really tackling the national debt, economic prosperity is not likely to be the result. Other than the $300 rebates, there is also little near-term economic stimulus in the tax bill.
In an economy which is already less robust than it once was, charities may find themselves facing harder times just when the services they provide may be needed more and governmental programs are able to do less. This is an ironic result from an administration which had promised strong support for local charitable initiative. Still, even at average contributions of just 2% of income, Americans are more generous in their charitable giving than most of the world, and Mississippians are more generous than most Americans, giving reason to hope that people will rise to the occasion regardless of what happens to their taxes.
Nathan Woodliff-Stanley is executive director of the Mississippi Center for Nonprofits in Jackson. His e-mail address is email@example.com.