21 April 2017

Dividing Philanthropy Into Favored and Disfavored Classes is a Bad Idea

Bloomberg had an article a few days ago reporting on efforts in Congress to force certain colleges and universities with large endowments to devote more towards lowering tuition costs (“Universities Seek to Defend Endowments From Republican Tax Plan,” April 18). This is an idea that has been kicking around for a few years at least, with Congressman Tom Reed (R-NY) having taken the lead on this issue.

Reed’s plan is still being formulated, but as described in the article it represents something close to an existential threat to the philanthropic sector. Here’s how Bloomberg described the proposal:

Reed… wants the richest colleges to spend more of their endowment income on tuition breaks for middle-income families.

Donors receive tax breaks for giving to nonprofits including colleges. Under Reed’s plan, which is still being developed, individuals may be able to deduct 150 percent of scholarship donations that support working-class students while unrestricted gifts would be deductible at 125 percent. Restricted gifts of more than $5,000 wouldn’t be deductible.

One of the strengths of the philanthropic sector in America is that the rich diversity of interests has all generally been treated equally as it relates to the charitable tax deduction. Regardless of whether giving was directed at relief of the poor, educational institutions, artistic and cultural organizations, religious faith, or other ends, there was no discriminating amongst the different areas that philanthropic dollars might be directed to. Section 501(c)3 of the tax code governs charitable organizations and lists several exempt purposes that cover just about everything imaginable:

“The exempt purposes set forth in section 501(c)(3) are charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.  The term charitable is used in its generally accepted legal sense and includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency.”

Reed’s proposal, or at least the outline of what he may propose down the road, would end this nondiscrimination among different charitable purposes, and instead establish what would be both highly favored charitable classes (unrestricted giving to certain universities as well as giving targeted to financial aid for middle-income and lower students) and highly disfavored classes (giving to certain universities earmarked for, say, library renovations or new lab equipment).

On the surface this may seem a trivial development, and possibly even beneficial – after all, who could be against boosting student aid? But a closer examination reveals the perils to philanthropy.

To begin with, this would set a precedent, and it would surely be followed by a stampede of interests demanding that their favored areas of philanthropy receive similar preferential tax benefits, and that disfavored areas be curtailed. Ultimately, it would lead towards a hierarchy of philanthropy dictated by politicians bowing to whichever constituencies seem the most vocal and consequential.

Some, such as California Attorney General (and former Congressman) Xavier Becerra have suggested in the past that giving to museums, symphonies, and other artistic and cultural charities might be less deserving of the same tax treatment as support for homeless shelters, food banks, and other organizations engaged in direct poverty relief. In a similar vein, David Callahan at Inside Philanthropy recently urged the charitable tax deduction be denied for giving to groups that engage in public policy. This would unquestionably weaken the charitable sector overall, as some areas of giving are pitted against others for different levels preferential treatment.

It would also be an enforcement fiasco. Anybody familiar with fundraising understands how this would play out – there would be a sharp decline in earmarked gifts to higher education, but development officials would still have pitched a specific program or project to the donor, and would understand that the donor expected the funds given to go towards what was described. Funds that came in “unrestricted” would quickly be allocated by university administrators to fulfill the donor’s unwritten but obvious expectations. Which in turn would entail demands for tough enforcement measures, and diminished philanthropic freedom, which can only lead to diminished giving.

Reed’s plan would also provide significant fundraising advantages to some colleges and universities over others. If all institutions of higher learning are subject to the same hierarchy of giving outlined, then those with fewer infrastructure and programmatic needs will more easily be able to shift fundraising towards the favored classes of student aid, while those that have campus facilities in urgent need of modernization will struggle to obtain the needed and now non-deductible funds. This would in fact reinforce the advantages that many prestigious universities have over their less well-heeled rivals, given the hundreds of millions of dollars that Ivy League and similar institutions have been able to spend in recent years building new facilities and modernizing existing ones.

In short, Reed’s proposal would likely set off a scramble for favored charitable classification, invite greater state intrusion into the fundraising process for higher education, diminish philanthropic freedom, and further entrench existing disparities between elite institutions and other colleges and universities. Elected officials and others looking for ways to make college education more affordable might want to look elsewhere than this misguided idea.