Driven Off Course

Car-donation programs report big declines since January

Americans have slowed their donations of cars to charities in the past six months — the apparent result of changes Congress made to tighten the rules for donors who write off such gifts on their income taxes.

The dent in donations has caused financial trouble for several groups that depend on such gifts for the bulk of their revenue, and has posed fund-raising challenges for scores of other charities. But some charities think the slowdown is temporary, and simply the result of many donors rushing to donate cars in the last few months of 2004 before the new rules — and for many donors, the less-generous tax breaks — took effect on January 1.

Lawmakers changed the deduction rules because they worried that too many Americans were inflating the amount they wrote off — and some legislators said that companies that run car-donation programs were not passing along enough money to charities.

Among the organizations that have seen a drop-off in donations:

• At the American Cancer Society, the number of cars donated from January to June was 4,985 compared with 8,145 in the same period in 2004.
• Charity Motors, a Detroit nonprofit group that sells donated cars to needy families, says car donations have dropped by more than 40 percent, or about 3,000 cars. The group says that means the charity has lost about $1.7-million in revenue.
• Volunteers of America, in Alexandria, Va., says the number of cars donated to its affiliates nationwide has dropped by 40 percent.

Under the new law, people who give away used cars worth more than $500 can deduct only the sale price of the vehicle. In the past, they could write off the fair market value, which is often much higher than the amount a charity gets from a car sale.

People who donate cars worth less than that amount can claim up to $500 without waiting to learn how much a car sold for, and those who donate cars to groups that use the vehicles to help the needy can still claim the fair market value.

Preventing Abuses

Rick Grafmeyer, a former deputy chief of staff of the Senate Finance Committee, says that the drop in donations so far is an indication that some donors were indeed giving cars to charities simply to take a deduction for more than the amount their cars were worth.

“The dips are almost too large not to have as a partial explanation that there were some abuses going on in this area,” he says.

Not only are charities getting fewer cars, but many organizations say the average value of the cars has declined. Volunteers of America has received about $100 less per car since January than it did before the new law. At Cars4charities, a nonprofit group in Utica, N.Y., that sells cars on behalf of charities that don’t have their own vehicle-donation programs, donations of cars worth less than $500 represent about 65 percent of its collections, up from about 40 percent.

Nonprofit officials say the deduction changes may have created an incentive for people to sell rather than donate cars worth more than $500, or at least to hold on to their old cars for longer before giving them to charities.

Some charities say they might have to become less picky about what cars they accept.

Volunteers of America, the American Cancer Society, and other charities are considering taking some cars they might once have rejected as a way to help compensate for the downturn in total donations.

At Cars4charities, that means accepting older cars that take longer — and cost more — to sell. Because of the extra expenses involved in selling older vehicles, the charity has increased the percentage of the revenue it keeps from car sales — to about 35 percent now, compared with 25 percent before the new law.

Some observers believe that the decline in car donations this year reflects, in part, the success charities had in persuading donors to give away their cars before the new law took effect in January. President Bush signed the law in October, but donors could write off the fair market value for all donations made for the rest of 2004.

Julia Andersen, who runs the National Kidney Foundation’s car-donation program, says some affiliates saw a 30-percent to 40-percent spike in car donations in November and December. Although she does not have firm numbers, Ms. Andersen says the group is getting fewer calls from people interested in donating cars this year. Nevertheless, she says, the group’s car-donation effort is “still a viable fund-raising program.” She adds, “We really think it’s just a matter of time before the program is up and running at its usual pace.”

Trimming Services

The downturn in revenue from donated cars has forced a few charities to cut services they provide. Volunteers of America’s Michigan affiliate, which relies on cars for about 80 percent of the money it raises from private sources, was forced to close a homeless shelter and may have to reduce the number of meals it serves to needy people. It has also eliminated a fifth of its 100-person staff.

“It’s really been a setback for us,” says Alex Brodrick, the charity’s chief executive officer. “We’re very thin throughout the organization, from top to bottom, with people multitasking and picking up more hours.”

Charity Motors, the Detroit group that gives cars to the needy, generates all of its revenue from car donations. It has laid off 12 staff members and says that the towing company it usually hires has also laid off some workers.

“This law has just had a ripple effect,” says Rick Frazier, a spokesman for the group.

Despite the financial squeeze some charities say they are facing, most groups that use cars to raise money are making only small cuts or waiting to see whether the slowdown in donations is a long-term problem.

Paula Skuratowicz, executive director of the Polly Klaas Foundation, a Petaluma, Calif., group that helps find missing children, has stopped using its Web master and other outside consultants and is looking at other ways to trim expenses. But even though 85 percent of the charity’s approximately $1-million budget comes from car donations, she is hopeful that the 20-percent drop in revenue so far this year won’t require services to be cut. She is also trying to turn the situation around by increasing advertising and reminding people about the program through her charity’s Web site.

Most charities rely far less on gifts of cars, so the drop in giving hasn’t yet led them to consider cutbacks. The American Cancer Society raises 1 to 2 percent of its budget from vehicles, while Goodwill Industries International receives about 0.5 percent.

Increasing Advertising

Not all charities have seen declines. AIDS Service Center, in Pasadena, Calif., which started its car-donation program two years ago, has recorded a 30-percent increase so far this year over the $10,000 it raised in 2004.

Anthony Guthmiller, the group’s director of marketing, says that informing its supporters about how the new tax rules work has helped keep car donations steady. His charity used a newsletter, an e-mail announcement, and its Web site to provide information on the new law before it was adopted.

Several other charities have increased their advertising budgets this year to promote their car-donation programs and clarify how the new law works. They say many donors are confused about the new legislation and mistakenly believe that Congress eliminated the deduction for used cars altogether.

The Burlington, Vt., office of Good News Garage, a nonprofit group that sells and gives away cars to low-income people, has spent between $30,000 and $40,000 this year on radio and newspaper advertisements in the state, double what it usually spends. Bruce Erwin, the Vermont group’s program director, is also devoting more time to interviews on television and the radio to talk about the car program.

Even with the increased spending, car donations have dropped 20 percent in the last six months, an undesirable but not unbearable decline, he says. Mr. Erwin says he expects car donations to rise again, at least somewhat, as the charity continues to get the word out about how car donations enable it to help others.

Mr. Erwin is hopeful that charities like his may not be as hard hit as others by the new law. In June, the Treasury Department clarified that, under the law, donors whose cars are sold to poor people at reduced prices can still claim the fair market value of their cars as a deduction. “In time I think donors will ferret out those organizations that give the cars to needy people as opposed to those that have a middleman to take it to an auction somewhere,” he says.

Volunteers of America says it is considering increasing the number of cars it sells to poor people, which currently make up less than a third of its total sales.

Mr. Grafmeyer, the former Senate aide, says the law was specifically designed to encourage more charities to take such a step. “It has always been the intention that legitimate players and programs still flourish,” he says.

Others, however, say the law has not turned out as legislators expected. Mr. Frazier, of Charity Motors, says that the law’s chief promoter — Sen. Charles E. Grassley, Republican of Iowa — miscalculated the effect the legislation would have on charities.

“One of Senator Grassley’s statements was that he did not feel this law would cost charities a dime,” says Mr. Frazier. “We’re hoping that when they see that most charities are down 40 to 50 percent, they will realize that they threw the proverbial baby out with the bath water.”

Senator Grassley says he believes the early indications are that the law is doing what he and his colleagues had hoped: reducing abuses. “The alternative to our reforms is to advocate tax fraud. We’re saying people shouldn’t be able to claim tax deductions they haven’t earned.”