Senate Should Kill Bill to Give Tax Cut to Those Who Don’t Itemize

A bill in the U.S. Senate that is designed to increase charitable giving, in part by giving tax breaks to people who don’t itemize on their federal tax returns, is penny-wise and pound-foolish.

While the measure, called the Charity Aid, Recovery, and Empowerment (Care) Act of 2002, might result in a meager amount of new money for charity, it would cost the U.S. Treasury much more in lost revenue — billions, in fact — that could be used for social services to aid the very people whom charities aim to help.

The bill is intended to increase charitable contributions from people who don’t itemize, corporate donors, and older Americans who want to donate their individual retirement accounts to charity. In addition, the measure aims to give the federal government more incentives to funnel money to religious groups that offer social services.

The bill is sponsored by Senators Joseph I. Lieberman, a Connecticut Democrat, and Rick Santorum, a Pennsylvania Republican, with strong backing from the White House.

The measure, which may be taken up by the Senate Finance Committee in the next few weeks, is a watered-down, compromise version of a bill — HR 7 — that was passed by the House of Representatives last year. The House legislation, which was deeply flawed, not least because it would have allowed discrimination in hiring by congregations or other faith-based groups that received federal money, triggered intense opposition in numerous quarters.

The Care Act is also problematic and should be substantially altered, or, better yet, rejected.

Its provision to give taxpayers who do not itemize up to $400 a year in tax breaks ($800 for married couples) makes little or no sense. For every dollar of lost federal revenue, the deductions would result in only 12 cents in new philanthropic giving, according to a recent study by the Congressional Research Service. Only 6 cents would go to nonreligious activities, while giving to needy people would amount to no more than 1 to 2 cents.

Indeed, the measure would result in a loss of more than $4-billion a year in federal revenue. A study by the Center on Budget and Policy Priorities, a Washington research group, came to a similar conclusion.

While deductions for people who don’t itemize might be tolerated in times of enormous economic growth and large federal-budget surpluses, it would be inappropriate in today’s climate of impending budget deficits, large cuts in social programs for needy people, huge tax reductions for the wealthy, and massive needs in the nation’s educational and health systems.

Despite its serious shortcomings, the deduction is being championed by many nonprofit organizations, most notably Independent Sector, a coalition of major charities and foundations. In fact, the deduction, whatever its form, size, or circumstances, has become one of Independent Sector’s top policy priorities.

Independent Sector was willing to support HR 7, even though that measure proposed an even weaker provision to encourage giving among people who don’t itemize. Yet the organization sat on the sidelines while Congress repealed the estate tax. The repeal will significantly reduce charitable contributions, shift more of the tax burden away from the wealthy, and, within a few years, cost federal and state governments billions of dollars that could otherwise be spent on programs for the poor.

One might have hoped for more enlightened leadership from one of our most prestigious nonprofit organizations.

In a boon to private foundations, the Care Act of 2002 would reduce the excise tax on their net investment income to a flat 1 percent, compared with the 1 percent or 2 percent they now pay. But the legislation fails to earmark all or part of that revenue — approximately $300-million a year — for the expansion of resources needed to regulate nonprofit groups, the original purpose of the excise tax.

While both Independent Sector and the Council on Foundations have, for several years, called for greater accountability of nonprofit groups by giving more federal money to the Internal Revenue Service, they have been unwilling to push for legislation that would enable the IRS, and perhaps state attorneys general, to use the excise tax for that purpose. The Care Act of 2002 gives them an opportunity to do so, but they have not pushed for such a requirement.

The Care Act of 2002 also contains language that should be of concern to groups that worry about the accountability and integrity of the philanthropic world.

The bill would permit federal agencies and charities to distribute federal funds directly to religious congregations and other small nonprofit organizations that are not designated by the IRS as tax-exempt groups under Section 501(c)(3) of the federal tax code and thus not covered by IRS accountability rules.

In the interest of accountability, however, federal support of nonprofit organizations should be restricted to groups that have 501(c)(3) status. It is not difficult to obtain such a status, and the Care Act of 2002 authorizes an expedited process for nonprofit groups seeking that designation.

What’s more, the Care Act contains no language prohibiting discrimination in hiring procedures by congregations or other religious groups. That is a red flag that should alert the Senate.

The legislation also raises a potentially dangerous distinction between nonprofit groups that provide social services and those that conduct policy, advocacy, and organizing activities. The bill would establish a $145-million Compassion Capital Fund that would be distributed to social-service providers, while the accelerated process for gaining charity status, including a waiver of fees to the IRS, would also apply only to social-service organizations.

That amounts to discrimination against advocacy groups. The same issue was at the heart of the fight against a House effort in the 1990s to curtail the advocacy voice of nonprofit groups, and opposition to a proposal by Dan Coates, then a Republican senator from Indiana, to give tax credits for donations to antipoverty groups that provide services.

The Care Act of 2002 would in effect divide the nonprofit world into two groups: advocacy organizations as the bad guys, ineligible for federal money, and service providers as the good guys, eligible for support. That would set a dangerous precedent, both for the federal government and for nonprofit groups themselves.

The act faces an uncertain future. If passed, it would go into a House-Senate conference committee, where Rep. J.C. Watts, probably supported by the president, would try to resurrect some of the worst elements of HR 7.

The Care Act’s weaknesses and dangers far outweigh its few positive features. At a time when there are so many issues crucial to our national well-being up for congressional action, the bill seems frivolous and diversionary. It should be buried in the Senate.

Pablo Eisenberg is senior fellow at the Georgetown University Public Policy Institute and a member of the executive committee of the National Committee for Responsive Philanthropy. He is a regular contributor to these pages. His e-mail address is pseisenberg@erols.com.