Senate Finance Mulls Charitable Giving Reform

Overhaul of the charitable deduction and tax-exempt groups’ political involvement are two areas senators could consider

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As the Senate Finance Committee works toward reforming the U.S. tax system, the committee’s majority and minority staff last week issued a paper laying out challenges and goals for members as they review tax rules for exempt organizations and charitable contributions.

The paper, ninth in a series by the committee staff compiling tax reform options, lists several potential goals it says could serve the committee members as guidelines for their review:

  • Increase the efficiency and effectiveness of any incentives for charitable giving that are retained or reformed
  • Consider whether tax incentives for charitable giving should be made available to more taxpayers
  • More tightly align tax-exempt status with providing sufficient charitable benefits
  • Scrutinize the relationship between political activity and tax-exempt status
  • Reconsider to what extent tax-exempt groups should be allowed to engage in commercial activity
  • Improve the accountability and oversight of tax-exempt organizations

The paper counts about 1.5 million tax-exempt organizations with $2.7 trillion in assets and 29 different types of tax-exempt organizations. It describes some specific concerns related to the tax rules associated with these groups.

The charitable deduction, available to only the roughly one-third of taxpayers who itemize, raises concerns about its fairness. The paper says the Finance Committee will question whether giving incentives should be the same for all taxpayers.

The paper looks at how changing the deduction might affect giving. It notes, for example, suggestions that governmental gift matching programs might increase giving, but also arguments that these don’t work well in practice. It says other research suggests that cutting the deduction absent other reforms would reduce giving.

Some tax-exempt organizations are allowed to engage in political activities, a touchy topic on Capitol these days in the wake of the IRS’s targeting certain conservative nonprofits for special scrutiny. The committee paper presents arguments for and against tighter and looser restrictions on political activities.

Related to this is the concern about organizations granted tax-exempt status that do not provide a benefit to the public, particularly underserved populations. The paper notes that some tax-exempt organizations appear to benefit private interests in the same way for-profit entities do.

Another area of concern is commercial activity engaged in by certain tax-exempt organizations. The paper says some think this activity results in unfair competition with for-profit businesses and erosion of the corporate tax base, or that managers may devote too little time to the tax-exempt purpose of the organization.

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Check out What Really Drives Giving? (It’s Not Tax Breaks) on AdvisorOne.

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