Productivity Commission Proposes Repealing Tax Deductions For Donations to Private Schools
In a much anticipated, nearly 500 page report entitled “Future Foundations for Giving,” Australia’s Productivity Commission recommended the repeal of tax deductions for donations to private secondary schools. From what I can tell, the Productivity Commission is sort of like our Government Accountability Office. The report is much more than just that hot button proposal. If you are interested in the taxation and regulation of Australian Civil Society, there is plenty of deep discussion on a wide range of issues. It includes discussion of the apparent rationale from excluding organized religious groups from the class of organizations donations to which generate charitable contribution deductions.
The Commission released the report yesterday and the proposal regarding private secondary schools faced almost immediate opposition within the Executive, according to the Sydney Morning Herald. It is a long report and I only read up to the part regarding private schools. But it identifies issues we face in our own laws. The first is the apparent lack of a single policy rationale explaining why donations to some organizations generate tax deductions — the class comprising “deductible gift recipients” under Australian law — and donations to others — non DGRs — do not.
We might learn some things from the Report. First, the Commission proposed a broadly stated rationale to determine when organizations should be tax deductions granted to their donors. The rationale informs the concept of “public charity:”
The Commission proposed a comprehensive overhaul of the DGR system applying a principles-based framework to assess and improve the DGR system. This will simplify the current system, reduce the risk of distortions to giving due to different treatment of activities that offer very similar outcomes and provide guidance to underpin its future development. There should be three criteria to determine if a class of charitable activity is within the scope of the DGR system.
First, there is a rationale for taxpayer support because the activity is expected to generate net
community-wide benefits and would otherwise likely be undersupplied.
Second, there are net benefits from providing government support for the activity through subsidising philanthropy (as opposed to other government funding mechanisms, like grants).
Third, there is unlikely to be a material risk of converting tax-deductible donations to private benefits for donors.
It is from the third “principle” — the risk of private benefit — that the Commission concludes donations to private schools should not generate tax deductions. And I gotta tell you, the Commission’s argument is not half bad:
School education should be funded outside the DGR system
Most school education activities are already outside the scope of the DGR system, except when provided by public benevolent institutions or for school infrastructure, libraries and scholarships.
School education is a priority for governments and there are sound economic and social reasons for government support. Reflecting this, extensive government funding is provided outside the DGR system. For these services, tax-deductible donations are not the best mechanism for allocating government support to where it is needed. Government funding provided through tax-deductible donations would not be allocated on the basis of need, or even on a universal basis. Rather, because donations from people in higher marginal tax brackets receive a larger tax deduction, it would provide higher levels of indirect government support to schools servicing communities with a greater capacity to donate.
The Commission has similar concerns about school building funds. Tax-deductible donations are unlikely to be the best mechanism for allocating government support for school infrastructure. Of those primary and secondary non-government schools that receive donations for school building funds, half of these schools receive about 95% of the donations.
In addition, there is the potential for a donor to be able to directly or indirectly convert a tax-deductible donation into a private benefit. Potential donors are most likely to be people directly involved with the school and benefit directly from donations, such as students, their parents or alumni. Evidence from participants is that the share of parent contributions relative to those from alumni and other donors vary widely. The transaction here is closer to a market exchange of donations for lower fees and this could incentivise recipients to make tax-deductible donations to lower the non-tax-deductible price they are charged for the good or service. In these circumstances, it is unlikely that including school building funds or school education in general within the scope of the DGR system would provide net community benefits.
Many participants argued that parents and students do not gain a private benefit from donations to school building funds because fees are not reduced in an explicit quid pro quo or because the lead times for infrastructure mean that new facilities would be used by future students. However, there is little doubt that substitution – broadly defined – between donations and fees does occur. Indeed, many participants responded to the draft report by stating that withdrawal of DGR status for school building funds would create upwards pressure on costs for parents.
School building funds for primary and secondary schools and religious education would be the main entities that would no longer be eligible for DGR status under the Commission’s proposals. There are currently about 5,000 DGR endorsements for school building funds. Of these, three-quarters are charities and the remaining quarter are government entities, such as public schools. Transitional arrangements would be required so that schools can adjust (described below).
darryll k. jones