Wednesday, October 9, 2024
A Proposal to Replace the Charitable Deduction with Matching Grants
Robert McClelland, from the Urban-Brookings Tax Policy Center has a really provocative piece in The Chronicle of Philanthropy. He argues that we should do away with the charitable contribution deduction and replace it with matching grants paid directly to charities. I don't know what to think about it and it would take me more time than I have to even start. Here is an excerpt:
For decades, the U.S. tax code has subsidized donations by allowing taxpayers to deduct contributions to nonprofits from their income. But only taxpayers who itemize when filing their tax return can take advantage of these deductions — and those with the highest incomes benefit most. When the individual provisions of the Tax Cuts and Jobs Act expire at the end of 2025, the standard deduction will decrease. This means tax incentives for charitable giving will be extended to more people because a larger number will be able to itemize their deductions.
But Congress can go further. It can encourage everyone to donate, regardless of their income — even those who don’t file taxes. How? By replacing the deduction with a system of matching grants. Here’s how it would work: Individuals would no longer claim deductions for donations. They wouldn’t even have to file tax returns to benefit. Instead, nonprofits would report donations to the government and receive matching funds in return, giving the same incentive to anyone who donates.
For both cash and noncash contributions, such as art or stocks, donors wouldn’t need to keep receipts or fill out forms for their donations to be matched. Instead, charities would report contributions when they file a Form 990, which details their revenue and income to the Internal Revenue Service. The match rate itself could correspond with the marginal tax rate of the average return, which by my calculations could be about 14 percent. Such an approach would increase the incentive for most lower-income households to donate, while lowering the incentive for most higher-income tax filers since they, like every other taxpayer, could no longer claim a deduction. The result: A more democratic and representative form of giving.
A large body of evidence, cited in a report I wrote for the Tax Policy Center, suggests that even for the same cost to the government as the current system, matching grants would provide a more effective incentive to donate than a credit or a deduction. Numerous lab experiments show that contributions increase more in response to matches than they do to equivalent rebates. For example, in one classic study published in 2003, researchers found that contributions were 21 percent to 97 percent higher for matches than for rebates. A 2017 experiment found similar results.
Wouldn't the proposal merely entrench the rich and powerful in Civil Society by increasing at faster rates, relative to other donors, whatever exponentially greater donations billionaires already make? It sounds like McClelland has been after this idea for awhile so his research probably answers the question. You can access his research via the links in the excerpt above.
darryll k jones
https://lawprofessors.typepad.com/nonprofit/2024/10/the-case-for-doing-away-with-the-charitable-deduction.html
Another problem with this idea is the potential for viewpoint discrimination by the federal government exercised against unpopular 501(c)(3) organizations. I can hear the cries from legislators, regulators, and "public advocates" that we need some way to align federal expenditures of matching funds with the policy interests as identified by those same constituencies. Publication 78 eligibility would not be the sole governing criterion when a perception of scarce government resources is perceived or assumed.
Posted by: Michael L. Wyland | Oct 10, 2024 9:42:25 AM