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Extending the Charitable Deduction Beyond the COVID-19 Pandemic

Posted on Apr. 20, 2020
Margaret Ryznar
Margaret Ryznar

Margaret Ryznar is a professor at the Indiana University Robert H. McKinney School of Law.

In this article, Ryznar argues that the limited above-the-line charitable deduction authorized by Congress during the coronavirus pandemic should remain a permanent feature of U.S. tax law.

Copyright 2020 Margaret Ryznar.
All rights reserved.

Some provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) have received widespread attention, such as those authorizing loans to businesses and payments to individuals.1 Other provisions have received less attention, including one that allows taxpayers an above-the-line deduction for up to $300 in charitable donations in 2020.

Many charities have received attention for helping during the pandemic. They have been featured in the media and during televised fundraisers for coronavirus aid, such as Elton John’s “iHeart Living Room Concert for America,” which raised more than $8 million.2 Charitable causes seeking donations to help during the coronavirus pandemic range from procuring food for school children to locating equipment for hospitals. Those are important supplements to the government response to the pandemic, but the charitable deduction tax change in the CARES Act has received less attention.

Many people might not realize that there has been a change to the law on the charitable deduction, which has been below the line in recent years and available only to itemizers.3 With the 2017 tax reform greatly increasing the standard deduction, the number of itemizers significantly decreased. For most people, that reduced the effect of the below-the-line charitable deduction as a tax incentive for giving.4

The recent history of the charitable deduction as being below the line has not stopped people on both sides of the aisle from urging that the charitable deduction be an above-the-line deduction instead. For example, President Clinton included a provision in his 2001 budget proposal permitting non-itemizers to deduct 50 percent of their charitable contributions above specific floors. President George W. Bush also called for extending the federal charitable deduction to nonitemizers.5 Charities themselves have lobbied for a deduction for nonitemizers and now have received a limited one with the CARES Act.6

The charitable deduction change made by the CARES Act raises the issue of how enacting new tax legislation creates a time lag until people learn of it. Tax changes may create difficulty in people’s ability to plan, thereby losing some of their function as quick incentives. There is a strong case that tax law can create incentives for individuals to act in a specific way, but the case may be stronger in the context of corporations, which benefit from extensive legal advice on how to minimize taxes. The result may be a lag in small gifts from people who would not qualify for a charitable deduction without the CARES Act. This lag is a problem because charitable contributions are valuable for coronavirus-related charities now, even in smaller amounts from people with all levels of income.

Indeed, the COVID-19 pandemic shows that there are two types of charitable donations: significant sums exceeding $1 million and small amounts from most people.7 Charities benefit from both kinds of gifts, as seen by universities that regularly seek multimillion-dollar donations in exchange for naming rights as well as a few dollars from each alumnus. These two types of donations have various functions and show the reliance of charities on donations for various reasons. For example, while big-money donations can fund the construction of new facilities, smaller donations can inspire donors volunteering their time as well as donating money.8

Studies have been conducted on which group of donors is more likely to give — the wealthiest people or the rest — in order to best tailor the charitable deduction to maximize its effect. The results are mixed.9 However, for different reasons it is worth creating incentives for both types of giving, which can be done through both a limited above-the-line charitable deduction for most people who don’t itemize and a less limited below-the-line charitable deduction for itemizers who want to make major gifts.

For every tax incentive, there is a financial cost from the forgone tax revenue that should be considered. The cost is borne because of the value placed on the incentivized behavior. For example, the charitable giving tax incentive has been criticized for its cost, but its continued existence has been justified by the value placed on charitable giving.

However, there are other cost advantages from tax deduction incentives. A charitable deduction, because of its structure as a tax deduction, costs the treasury less than what the charities receive from the donors. Further, the above-the-line deduction can be limited to a dollar amount of donations, like $300 under the CARES Act. The charitable deduction is no stranger to limitations.10

In sum, an extensive network of laws, including tax incentives, is intended to increase efforts toward socially desirable goals. Regardless of the significant debate about appropriate incentives for charitable work, the federal government has continued to seek increasing charitable giving through the reach of its tax laws.

Given that tax is a policy tool, it makes sense that tax law frequently changes. The charitable deduction is one example. While the importance of the charitable deduction decreased in the 2017 tax reform, it has returned during the COVID-19 pandemic with the CARES Act. There are advantages to the most helpful changes made in response to the pandemic, and a limited above-the-line charitable deduction could be one of those tax changes worth keeping.

FOOTNOTES

1 See, e.g., Stacy Cowley, “F.A.Q. on Coronavirus Relief for Small Businesses, Freelancers and More,” New York Times, Apr. 9, 2020.

3 Section 170.

4 Linda Sugin, “Competitive Philanthropy: Charitable Naming Rights, Inequality, and Social Norms,” 79 Ohio St. L.J. 121, 133 (2018).

5 Ellen P. Aprill, “Churches, Politics, and the Charitable Contribution Deduction,” 42 B.C. L. Rev. 843, 854 (2001).

6 “Since 1986, charities have continued their advocacy of the nonitemizer deduction.” Robert A. Boisture, Catherine E. Livingston, and Kristen A. Gurdin, “Charitable Giving Tax Proposals,” 12 J. Tax’n Ex. Org. 235 (2001). “In fact, Congress enacted a charitable deduction for nonitemizers in 1981. That provision was phased in gradually over five years, from 1982 to 1986, and expired at the end of 1986.”

8 Kimberly Yao, “Who Gives? The Determinants of Charitable Giving, Volunteering, and Their Relationship,” Wharton Research Scholars (2015) (noting that charitable giving and volunteering are complements).

9 See, e.g., Grace Soyon Lee, “Mitigating the Effects of an Economic Downturn on Charitable Contributions: Facing the Problem and Contemplating Solutions,” 22 Cornell J.L. & Pub. Pol’y 589 (2013) (outlining the criticisms of the charitable deduction). But see Patrick E. Tolan Jr., “Compromising the Safety Net: How Limiting Tax Deductions for High-Income Donors Could Undermine Charitable Organizations,” 46 Suffolk U. L. Rev. 329 (2013) (noting the importance of the charitable deduction to giving).

10 Harvey P. Dale and Jill S. Manny, “Social Welfare Organizations: Better Alternatives to Charities?” 21 N.Y.U. J. Legis. & Pub. Pol’y 337 (2018).

END FOOTNOTES

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