Tax Reforms Must Not Come at the Cost of Faith-Based Organizations

Tax Reforms Must Not Come at the Cost of Faith-Based Organizations

Stanley Carlson-Thies, May 25, 2017

The Trump administration has promised to press for dramatic tax reform, accelerating discussions that have been going on in Washington, DC, for years.  Tax reform has many goals: accelerated economic growth, increased federal income, simplified filing for taxpayers, less distortion of economic decision-making, new incentives for global US companies to repatriate foreign earnings, etc. Without care, though, tax changes may actually undermine civil society, including churches and faith-based services.

The explanation for this is simple. Religious groups and other nonprofit organizations count for much or all of their income on donors, and the amount of charitable giving depends significantly on federal tax policies.  This is a complicated topic, predictions are inherently imprecise, and Congress and the President have yet to settle on exact reforms.  But a recent study by the Lilly Family School of Philanthropy concludes that adoption of two major changes in discussion—reducing the top tax rate to 35 percent and nearly doubling the value of the standard deduction—would likely reduce charitable giving by up to $13.1 billion, with slightly more of the decline suffered by congregations than by other nonprofits.  However, all of this decrease could be more than offset, and giving could actually be increased by nearly $5 billion, if those two changes were combined with a revision of the charitable deduction so that it can be claimed by all taxpayers who donate, not just those who itemize.

Of course, the main motivation for giving is to support some positive initiative: an inner-city parochial school, an environmental think tank, a house of worship, a research university, the opera.  Yet, increased taxes crowd the ability to give and so, for 100 years, the federal tax code has included a charitable deduction to encourage charitable giving.  For now, that deduction is available only to donors who itemize on their taxes, a fraction of taxpayers.  Philanthropy researchers are deeply concerned that this incentive to give will be greatly weakened by the proposed doubling of the standard deduction, since even fewer taxpayers are likely then to itemize their deductions.  The goal of a new universal charitable deduction is to offset this major disincentive and instead to encourage greater giving by all taxpayers, including those with moderate and low incomes, who are not now itemizers.  In the face of proposals from both sides of the aisle during the past several years to enact tax changes of various kinds that would reduce incentives for charitable giving, the concept of universalizing the charitable deduction is drawing broad support in the nonprofit world.

To be sure, if the charitable deduction is universalized, federal income will drop to some degree.  But instead of seeing that as a loss to the federal treasury, as if all money really belongs to Washington, we can better regard the charitable deduction as the federal government’s recognition that money that a taxpayer donates to civil society is just not part of taxable income.

And that perspective reminds us of the great good that is accomplished by civil society initiatives, great good that we should acknowledge and celebrate without denying the vital role of government action.  Here are three recent reminders.

• A new Partners for Sacred Places study estimates that the average historic urban church or synagogue in the US generates more than $1.7 million each year in economic impact (salaries, purchases, provision of meeting spaces and volunteers, etc.), with 87% of the beneficiaries of those sacred buildings’ programs not even members of the congregations housed in these buildings.

• A preliminary study of homeless services provided by faith-based organizations in eleven cities shows that they provided nearly 60% of the emergency shelter beds in those cities while being funded mainly by private giving and producing positive long-term outcomes for homeless persons and families.

• A 2016 academic report on the social and economic contributions to US society made by congregations, religious charities, and faith-inspired businesses estimated a total annual value of $1.2 trillion, more than the combined annual revenue of the top ten tech companies.  Brian Grim, the principal researcher, notes that a person going out in the morning in search of coffee at Starbucks will pass, on average, 26 houses of worship, and almost all of those offer multiple services to people in their neighborhoods.

It is up to policymakers to decide how much the government should spend and how to raise the needed funds.  In doing so, though, it is essential to keep in mind the consequences that tax changes will have on other important areas of life, not least on the resources available to nonprofit organizations, both religious and secular.