Will the Proposed Tax Changes Hurt Charities?
Recently, The Wall Street Journal published in its opinion section, the views of Mr. Howard Husock, vice president of Policy Research at the Manhattan Institute and Director of the Manhattan Institute’s Social Entrepreneurship Initiative. The Manhattan Institute is a New York based 501(c)(3) charity. Mr. Husock expresses his views that the proposed changes to the charitable tax deduction being proposed by some in Congress will hurt charities in the long-run. Below is an excerpt of the story,
The essence of the looming discussion: Should the charitable tax deduction be reserved only for those organizations that can show they are directly serving, in the phrase of Rep. Xavier Becerra (D., Calif.), “the poor and disadvantaged”? The congressman, a member of the tax-code-writing House Ways and Means Committee, has also expressed “intense concern” about what he views as the low level of racial and ethnic diversity within organizations supported by charitable contributions.
As he told Nonprofit Quarterly: “You will see a correlation between those that are diverse and those that are doing a good job of reaching those in need.” Then he explained his economic logic: “I start off with the proposition that if you’re getting a tax subsidy, another taxpayer must make up for what you’re not paying. That subsidy should serve a good purpose. . . . Statistics I’ve seen suggest that only one in every 10 dollars are serving poor people or disadvantaged people. I have to wonder where the other nine are going.”
Clearly, Rep. Becerra — and he is not the only politician voicing such sentiments — would like to attach strings to the charitable deduction, requiring organizations to conform to racial or economic quotas. But such a policy could well undermine the efforts of those offering direct help to people in need.
The St. Bernard Project is a case in point. On paper it might well fail a number of Rep. Becerra’s implied tests. Its clientele — truck drivers, fishermen, sugar-refinery workers — are neither unemployed nor technically poor. All, by definition, own a significant asset — a home that needs repair. Both clients and staff, moreover, are predominantly white — St. Bernard’s is a big step up the economic ladder from the adjoining Lower Ninth Ward of New Orleans, a place much poorer and blacker and more closely associated with the suffering from Katrina. But there is a preventive aspect to a lot of charity. As Mr. Rosenburg notes of the St. Bernard Project: “If we didn’t address the needs we see here, our people would quickly become the poorest of the poor.”
If the IRS begins micromanaging the charitable tax deduction, it is hard to know where it will stop. How long would it take for the IRS to deny the incorporation of a new nonprofit on the grounds that a similar one is already serving a given area? The St. Bernard Project was far from the first home-rebuilding effort in greater New Orleans. Yet it has found its way clear to helping many who couldn’t qualify for government assistance — because it can operate with a discretion that the government inevitably lacks. “We understand some people had to get out without thinking about grabbing their gas bill,” says Mr. Rosenburg, referring to a famous FEMA prerequisite for aid. Reporting details of day-to-day operations to the IRS would make him, in effect, a government subcontractor, not the role for which he and other social entrepreneurs sign up. Even a program doing the sort of work that Rep. Becerra favors might, in other words, have no easy time proving it.
For the full story, please click here – The Wall Street Journal.
Professor David Brennen, one of a lead editors this blog, wrote an article in 2006 on using alternative rationales for the grant of charitable tax exemption under the Internal Revenue Code, and by way of extension, I would add, for the grant of a charitable tax deduction, too. He offers what he calls the Contextual Diversity Theory as an alternative and equally compelling reason for granting charity status to nonprofits on the basis of diversity and creativity. The traditional rationales revolve around economic efficiency. As Professor Brennen explains, the “contextual diversity theory posits that the charitable tax exemption is a means of diversifying the market and, thus, allowing for more creative and wealth producing opportunities.” Further, he explains “that the exemption is subject to contextual constraints that act to limit the scope of charitable activity.” I believe that Professor Brennen’s theory would embrace the views of rep. Becerra and others in Congress looking to link the grant of tax relief to considerations beyond economics, such as race and relief of the poor. While Professor Brennen’s theory would encompass those reasons, he does not advocate or suggest that those are the only basis upon which for granting charity status. Click here to learn more about Professor Brennen’s work.
In an earlier blog, June 25, 2008, I also mentioned that there was a growing concern among some charities and other observers that in recent times, fewer and fewer charities are tackling the difficult needs of race and poverty so perhaps Rep. Becerra is on to something.
AMT