When we consider American values, charitable giving is among the top characteristics of our culture. Year after year, our commitment to giving ranks among the highest in the world.
Over the past century, these altruistic inclinations have been matched with tax incentives for giving to charity by state and federal governments. This giving is not only good for our conscience, but it’s good for our society, from spurring medical research to building more vibrant communities to providing a safety net for those most in need.
{mosads}So why is Congress now considering changes to the tax code to double the standard deduction? Just 20 percent of taxpayers claim those deductions as they are now, so why reduce the already-too-slim proportion of who can benefit from existing incentives for charitable giving? Instead, lawmakers should adopt a new approach that treats taxpayers more fairly, broadens the nation’s philanthropic base and helps defray government spending.
An innovative and beneficial add-on to the tax reform bill would be to authorize “Flexible Giving Accounts” (or “FGAs”). These accounts would allow American workers – whether they itemize deductions on their tax returns or not – to set aside pre-tax money for charities of their choice.
More than 100 million Americans who opt in to consumer-directed accounts (i.e. FSAs, HRAs, HSAs, dependent care and transportation) would find this charitable giving account comparable. With FGAs, millions more Americans would be able to efficiently leverage the tax code to benefit worthwhile charities of their choice, creating a whole new class of “everyday philanthropists.”
More than two-thirds of households give to charity, and research has shown that when presented with the opportunity, people take advantage of new ways to donate. Those who do should get a tax benefit.
Currently, the tax code allows income tax deductions for charitable donations, but only the roughly one-third of filers who itemize deductions on their returns receive the benefit. Nearly all individual taxpayers in the highest income tax bracket itemize deductions and can reduce their tax obligations through a charitable deduction.
In contrast, fewer than a quarter of Americans making less than $100,000 itemize and are unable to receive a tax reduction from their giving. The proposed hike in the standard deduction that’s now on the table would discourage taxpayers from itemizing deductions and reduce an important incentive for charitable giving.
Here’s how FGAs would level the playing field.
In the current business environment where employers are adjusting their benefits packages to attract and retain millennial workers, companies could offer this opportunity to set aside a portion of their pre-tax earnings for charitable contributions as an extension of their existing benefits plans. Each participating employee would select a certain amount from each paycheck to go into a dedicated FGA. The employee could then distribute that money to the charitable organizations of his or her choice. That could include qualified religious and educational organizations and any other entities for which donations are currently tax deductible.
This new option would complement the standard deduction and traditional itemized charitable income tax deduction. And it’s an immediate, bipartisan solution. Implementation only requires a simple update to the tax code and would not affect those who itemize their contributions.
To avoid ethical concerns about double-dipping and additional labor by the IRS, taxpayers who make use of a FGA would be unable to file for a charitable deduction, and those who itemize their charitable deductions would be unable to use a FGA for the charitable gifts they itemize.
Additionally, because it makes use of a common method of employee benefits management, it would be easy and inexpensive for many companies to establish. Drawing from personal business experience as the founder and current Chairman of a third-party benefit administration company, we can say with confidence that this adds little expense for any company to administer. In our case, we wouldn’t charge participants anything to add the option.
FGAs would especially yield distinct benefits to small-to-midsized businesses that could pay less in payroll tax. What’s more, there is a growing body of evidence supporting the wellness benefits of individual giving. Improving corporate citizenship also has been shown to improve sales, brand reputation and visibility, and employee recruitment and retention.
This model also would enable the public and private sectors and the philanthropic community to work together to increase the national giving rate – which could dramatically reduce expenditures for government-funded social programs. Increased charitable giving can save the government money by reducing spending costs; if a charity is providing sufficient welfare assistance to those in need, there is less demand for direct government benefits. FGAs also provide a fiscally responsible way for Congress to make America’s giving pool larger and more economically, geographically and racially diverse. Consider that donations to charity accounted for about 2 percent of GDP last year. If FGAs spur an increase of just one percentage point that would mean that hundreds of billions of dollars more would go to our nation’s charities.
Finally, as Rep. Suzan DelBene (D-Wash.) rightfully stressed any tax bill must be, this consideration is just a fundamentally fair approach. Many Americans do not have the capacity or resources for the meticulous record keeping it takes to itemize their returns, but they do deserve a tax break for their philanthropy. After all, donors who open their wallet for charity put their consideration for others first. The least we can do is seriously consider a way to benefit those who give.
As tax code reform moves forward, Congress has a unique opportunity to empower Americans to become even more generous givers. Adopting FGAs is an easy, bipartisan fix that would yield benefits for generations to come.
Daniel Rashke is the Chairman of The Greater Give, Inc., a non-profit formed to increase philanthropic giving and engagement, and Founder and Chairman of TASC, a Madison, Wisconsin-based benefits administrator, and Alyssa A. DiRusso is the Palmer Professor of Law at the Cumberland School of Law at Samford University in Birmingham, Ala.