charity tax loophole

27 Oct 2005

The NYT reports on an overlooked tax relief provision that promises some pretty impressive deductions in return for charitable giving:

It allows donors who make cash gifts to almost any charity by the end of this year to deduct an amount equal to virtually 100 percent of their adjusted gross incomes, double the normal limit of 50 percent of income. The tantalizing prospect has set off a financial scramble among some wealthy donors and charities vying for their dollars.

…

Fund-raisers say Mr. Wilson is one of many wealthy Americans pressing their financial planners in hopes of increasing their giving this year and reducing their tax bills. Some institutions, primarily universities, are encouraging big donors to take advantage of the favorable tax treatment and make sizable gifts or fulfill their pledges. Essentially, some donors may shift into 2005 gifts that would have been made in future years.

This will have some interesting ramifications, to be sure. I wouldn’t be so concerned except that the legislation does little to discriminate the type of charitable giving that yields these massive tax deductions. Giving to the ICRC is one thing, but do we really want to forego this tax revenue to encourage Joe Schmoe to kick back a wad of dough to his alma mater? And it looks like the lost revenue may be substantial:

Because of the strong interest, experts say the government may forgo more tax revenue than Congress anticipated when it passed the legislation. Based on information from 2002 tax returns, Robert F. Sharpe Jr., a fund-raising consultant whose clients include the American Heart Association and the University of California, Los Angeles, estimated that the provision would spur $4 billion to $10 billion in additional giving this year; 2005 giving was already expected to exceed last year’s total of $248 billion.

Mr. Sharpe said the additional giving would result in $1 billion to $3.5 billion in lost revenue for the Treasury, more than the $819 million Congress anticipated.

When this is all said and done (read: when no one but the academic sociologists and economists care), it will be interesting to compare who benefitted from the surge of charitable giving versus who is going to lose out when the inevitable next round of “belt-tightening” budget cuts come. (Hint: probably not any university endowments, for one.)