As currently contemplated by Congress, tax reform could lead to a decrease in giving. The Alliance for Charitable Reform and many of our allies in civil society are promoting what we call the Universal Charitable Deduction, which would allow all Americans to deduct their charitable donations from income (more on that idea here).
Other ideas are emerging to improve and expand charitable giving. Below is a guest blog post about one such idea — Flexible Giving Accounts. (ACR neither supports nor opposes this idea).
Americans are generous people who want to help people in need, and the charitable tax deduction helps to incentivize and recognize charitable giving. As part of tax reform, Congress should ensure that the value and scope of charitable contributions is enhanced— not diminished. One way to achieve that is to make it easy and fairer for everyone to derive the benefits of giving through a pre-tax payroll deduction, what I call The Greater Give.
Although noble in its aspirations, the current charitable income tax deduction falls short of the ideal. According to a study by the Tax Foundation, less than 20 percent of taxpayers with an Adjusted Gross Income (AGI) below $50,000 itemize their deductions. However, over 93 percent of taxpayers with an AGI greater than $200,000 itemize. Relegating the benefits to only the third of the population who itemize threatens the deduction’s fairness and effectiveness.
Disregarding the issue of itemization, the number of individuals contributing to charities has steadily decreased over the past 35 years, dropping from 84% of the adult population in 1980 to 72% of adults in 2015. Have Americans become less generous during the past half-century? Or have we made it more difficult for Americans to support charities? If it’s the latter, how have those impediments affected individual giving patterns?
What the Greater Give proposes is a new way to make it easier and less expensive for Americans wishing to support the charities of their choice. Our plan utilizes an existing architecture (i.e. pre-tax payroll deductions for accounts such as dependent-care, transit/parking, etc.) to encourage increased donations, simplify compliance and record-keeping, and spur employers to “lean-in.” This solution would enable and encourage more middle-class Americans to become everyday philanthropists.
Giving through the workplace is a proven method for charitable giving. In 2016, around $4 billion was raised through workplace giving initiatives. Companies are using workplace giving as a way to communicate the company’s values, promote employee involvement, and attract the best and brightest individuals. Companies that switched to a model that includes more choices for their employees reported an increase in participation and raised 73% more money.
While corporate philanthropy and citizenship is often perceived to be solely the work of large multinational corporations, small and mid- sized companies actually play a crucial role in community-oriented giving. In terms of percentage of profits donated, small businesses are far ahead of their larger counterparts and often look to make a tangible social impact in the community. Similarly, most mid-sized companies engage in corporate citizenship for the purpose of impacting their communities, not their bottom lines. Regardless of size, both corporate mega-donors and “everyday philanthropists” can use corporate citizenship to make a meaningful community-scale impact.
What I am proposing is the creation of Flexible Giving Accounts (FGA). FGAs can enhance charitable deductions in a way nothing in history has ever done.
So what exactly is a Flexible Giving Account? An FGA would be an employee fringe benefit account generally funded with pre-tax payroll deductions and managed by the employee allowing them to direct grants from their account to charitable organizations at any time.
Through the FGA, charitable contributions would be selected by employees and deducted from payroll on an ongoing basis, and an employer could add matching amounts. Only recognized 501(c)3 charities would be eligible.
Adding pre-tax deductions is not intended to change current the tax status of charitable giving. In fact, it complements the current system by adding a pre-tax deduction as new way to encourage and recognize charitable giving. This is similar to Section 129 of the tax code creating the Dependent Care Account to complement the Dependent Care Tax Credit.
Who would this affect? Businesses. Employees. Employers. Non-employees. Non-profits. Communities. You name it. There are very few that wouldn’t be impacted. Obviously, the main focus of this system is really about empowering employees with an equal opportunity to give, and communities to receive increased engagement and a drive toward increasing donations to non-profits. There is a growing body of evidence supporting the wellness beneﬁts of individual giving.
This is accomplished by providing charitable tax incentives to significant numbers of non-itemizing taxpayers. And because many non-itemizers have lower incomes and hence pay less tax, donations from this group subsidized by tax rules have lower tax cost than those that provoke revenue loss from taxpayers in higher brackets.
An FGA would have a positive impact on employers as well. If businesses could offer a simplistic program for employees to contribute on a pre-tax basis to a fund—employers could build an entirely different culture, a culture that would be sought after by potential employees, and could benefit many communities. An FGA would even make it possible for smaller businesses to promote philanthropy and charitable giving. And of course, employers will also enjoy the payroll tax benefit that accompanies cafeteria plan benefits.
Obviously, the largest impact of this change to the tax code would be felt by the charities. If more employees increase individual giving—even by small amounts—a significant difference can be made for people, companies, and society. Local and national charities can plan better if future income sources are better deﬁned.
The charitable deduction is also critical to the method by which charities are overseen. By incentivizing people to put their money in the hands of charitable organizations, the deduction creates motivation for those stakeholders to monitor the charity’s use of those funds.
So you see, there are no losers in this change, only winners.