01 February 2018

Taxes and Charitable Giving Are Not the Same

by Sean Parnell, Vice President of Public Policy, The Philanthropy Roundtable

Over the years, there have been numerous ways that people and institutions have employed to “repurpose” themselves as charities – in most cases for tax benefits.  Such schemes rarely work out well, as orthopedic surgeon and minister of the Church of Compassionate Service Dr. Timothy Dale Jackson might tell you. If, that is, you can get through to him at the federal prison in Yazoo, Mississippi where he is currently serving a 75-month term for tax evasion.

In response to the recent tax reform legislation, some state governments seem to be borrowing a page from Dr. Jackson’s playbook and are considering declaring themselves charities in order to allow their citizens to reduce their federal taxes.

In the past, taxpayers who itemized have been able to deduct the full amount of their state and local property, sales and income taxes from their federal taxable income. But the recent tax legislation capped the amount of state and local taxes that can be deducted at $10,000. As a result some taxpayers will see their taxable income, and thus their taxes, increase.

Some politicians in California, Maryland, and New Jersey (so far – others may follow) want to allow taxpayers to give money to a special fund set up by the state, ostensibly charitable in nature. Donors to the fund would receive tax credits on a dollar-for-dollar basis that could be used to offset state income tax liabilities. The money coming in to the state’s coffers wouldn’t change, the money sent to the state by the taxpayer wouldn’t change, but – and here’s the whole purpose of this maneuver – the money given to the state would be deductible for federal tax purposes as a charitable contribution. In essence, taxpayers in those states would be converting non-deductible state and local tax payments into deductible charitable contributions.

At least that’s the theory. There’s been a lot of ink and electrons devoted to explaining why this will or will not work (here are two of the more informative, first from the Tax Foundation explaining why it won’t, and second by a group of law professors explaining why it will). But it seems that lost in the question of whether it can be done is whether it should be done. From the perspective of philanthropists who give to support an independent, vibrant civil society, the answer is probably not.

The independence of civil society rests on the premise that government and charity are two very different things, and the existence of the charitable deduction is in part a reflection of this division. Both are supposed to be pursuing public benefits, of course, but the government relies on compulsion to achieve its ends (that’s not a criticism) while charities are voluntary in nature.

You can choose whether or not to give to the Boy Scouts of America or Meals on Wheels, generally with no consequence other than what your conscience compels. You can also choose not to pay taxes, but the consequences for that are quite a bit more dire (just ask Willie Nelson). Likewise you can pick and choose to which charitable associations’ requirements you want to adhere, such as a house of worship or civic group, and depart or ignore those associations at the time of your choosing. Government, on the other hand, tends to be more fastidious about obeying rules, and only with some difficulty can you quit it.

What is being proposed in California and elsewhere would blur the two, and suggest that government and charity are the same, or at least sufficiently indistinguishable in that sending money to the former is little different than sending it to the latter.

It’s certainly true that in some cases, giving to the government is charity. Probably the most common example would be someone donating to a state university, but many state and local governments also have parks, museums, hospitals, and other entities or agencies that accept charitable contributions. And some states even have programs that at least superficially look like what is being proposed in California, such as those that give tax credits to businesses and individuals who donate to organizations that provide scholarships for children to attend private schools.

These tend to be fairly narrow programs tailored to achieve a specific aim, often identical to what is being done in civil society. Gifts to a nonprofit hospital are tax deductible, for example, so making gifts to a state or county hospital tax deductible as well seems reasonable. Tax credits to advance specific types of charitable activity, like giving to scholarships or for land conservation, similarly reflect a legitimate government interest.

But what is being proposed is to declare the government itself a charity, worthy of the same consideration and treatment that is reserved for nonprofits that feed the hungry, house the homeless, heal the sick, enrich our culture, nurture our spirits, and educate the public. True, government does many of these things as well, but so does business. The government is not civil society, and changing tax policy to pretend that it is would threaten the integrity of both.

These schemes would turn the charitable deduction, an indispensable guardrail between government and civil society, into merely another tax dodge. This would make it even harder to defend the charitable deduction’s continued existence, let alone pushing to democratize giving by making the deduction available to all Americans. It threatens to erase the lines between government, which by its nature has to be somewhat inflexible and wide-ranging, and the millions of “little platoons” (as de Tocqueville called America’s charities) that are idiosyncratic, diverse in approaches, and focused on particular missions.

As for state and local governments, it can hardly be a positive if they are trying to get into the dubious tax strategies racket, competing to peddle tax avoidance schemes while adding nothing to true civil society. Taxes are taxes, charity is charity, and whatever the angst caused by the recent tax legislation, it would be best not to confuse the two.