When COVID-19 made its way to the United States, it did more than add “social distancing” to our vocabulary and face masks to our accessory collections. Congress, when it passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March, included a measure that our tax code had not seen in over three decades: a universal charitable deduction (UCD).
Nonprofit leaders have been urging the government to add a UCD for a few years now. Among the supporters of UCD has been NPQ, which wrote an editorial on the matter in 2018. The existence of a UCD measure in the CARES bill was an important step. But the actual provision in the CARES bill was exceedingly modest.
To understand this, a little history is in order. Prior to the pandemic, taxpayers who chose to take the standard deduction instead of itemizing their taxes were not eligible to deduct charitable contributions from their taxes. Because of a measure in the Republican tax bill of 2017 that doubled the amount of the standard deduction, more taxpayers have become non-itemizers, eliminating their ability to be incentivized for gifts to nonprofits. The number of itemizers fell from about 46 million to 19 million, which means approximately 27 million Americans who previously were eligible to claim a charitable tax deduction on their income tax form became ineligible to do so.
So, when the government announced the CARES Act included an above-the-line deduction of up to $300 per individual ($600 per couple) taking the standard deduction, making all taxpayers eligible for some tax benefit, that was a good thing, right? Wrong.
Sure, the temporary provision may be a step in the right direction, but it’s not nearly enough to spur the level of giving we will need to recover from the economic slowdown from COVID-19. Indeed, now is the time to implement a permanent universal charitable deduction to support our sector and the communities which we serve.
Again, to be clear, the $300 UCD is a positive step, but it is not even remotely close to adequate. To understand how inadequate the $300 cap is, consider this: prior to the tax law change, the average person earning less than $50,000 who claimed a charitable deduction deducted over $2,500.
Back in 2017, when the details of how the standard deduction would nearly double (and therefore increase the number of non-itemizers) were coming to light, nonprofit leaders began lobbying Congress to create a UCD, a measure that was once in the tax code in the early 1980s, but which had been left out of the US tax code since the 1986 tax reform bill.
In fact, Representative Mark Walker (R-NC) introduced HR 3988, the Universal Charitable Giving Act of 2017, in October of that year. The bill would have allowed for an above-the-line deduction for non-itemizers of up to one-third of the standard deduction for the individual—which would be most certainly more than just $300. However, the bill never got farther than being introduced.
And now that the pandemic has surfaced and the $300-capped UCD has been enacted, nonprofits are again lobbying Congress. This spring, over 200 nonprofits signed a letter addressed to leadership in both the Senate and the House of Representatives urging updates to the CARES Act. Specifically, they requested improvements to the above-the-line deduction by “increasing the $300/person cap and extending the effective date of the incentive.”
According to the Penn Wharton Budget Model, an increase to the UCD cap is more beneficial to the taxpayers and is the incentive we need to spur more giving to our struggling sector:
The provision would increase total charitable contributions in 2020 by about $110 million. This change amounts to a 0.03 percent increase….The negligible impact on total giving is in part due to the design of the deduction’s ceiling limitation: for the many non-itemizing families who already give more than $300, the marginal tax subsidy would still be 0 percent under the policy. Raising the ceiling or structuring the limitation as a floor would incentivize more giving but at a higher budgetary cost to the government.
The letter to Congress seems to have made an impact. Senator James Lankford (R-OK) introduced the Universal Giving Pandemic Response Act in June and Representative Walker is back with an identical bill in the House. Both of these bills extend the date of the UCD by allowing it to apply to gifts made after December 31, 2018, instead of December 31, 2019 in the CARES Act. The new bills also go back to the original Universal Charitable Giving Act of 2017 to increase the cap on the deduction to one-third of the amount of the standard deduction. With the standard deduction in 2020 being $12,400, individuals would be able to take an above-the-line deduction of over $4,000 this year (over $8,000 for couples).
This would generate considerable resources for nonprofits. It could also help (re)democratize giving. It is well known, as the research of Dr. Patrick M. Rooney demonstrates, that there has been a consistent decline in small-donor donations in recent years. If all taxpayers, whether they itemized or not, could deduct charitable donations from their taxes, this could help at least in part reverse this trend.
All of the above benefits bring me back to my original point: Why limit an increased UCD only to tax years 2019 and 2020? It is understandable that nonprofits need more assistance in the wake of the COVID-19 pandemic, yet if we really want to live in a society where the needs of citizens are fully met, why not allow this larger benefit to continue? Even Senator Lankford understands the importance of nonprofits in the community, saying, “Government is efficient at writing a check. Government is efficient at developing a program to be able to facilitate activities. Government cannot meet the human needs that are there like a family can and like a local nonprofit can.”
It may have taken a global pandemic for the federal government to realize the importance of allowing all taxpayers to benefit from charitable deductions, but why stop after 2020?
The effects of COVID-19 will be felt throughout the nonprofit sector for years to come. There are now more people in need, fewer resources, and less flexibility to serve those in need given new social distancing requirements. As Rooney states, if nonprofits are “neglected now, it may take decades or generations to rebuild our great charities, large and small, across all fields, from health and human services to arts and culture, as well as education, international affairs, and environment/animals.”
So now is the time to enact a permanent universal charitable donation. It may have been a health crisis that brought it on, yet, just as we are learning how to better protect ourselves from an invisible disease, we can also take this time to learn how to better support our nonprofit community and recognize the contributions of the donors who make our work possible.