We are always advocating for ways to increase the size of the philanthropy pie. In many cases, one of the best ways to do that is with enlightened tax policy. Not repealing the Estate Tax would be a good place to start. Allowing charitable deductions for non-itemizing taxpayers would be another. Allowing direct giving to charities from IRA accounts without penalty would be yet another great idea.
It may come as a surprise then that we think the Katrina Emergency Tax Relief Act of 2005 ("KETRA") has been over-hyped - at least regarding one of its most touted provisions. That provision, which allows donors to write off up to 100% of their adjusted gross income (AGI) for cash donations made from August 28 until the end of the year, is supposedly meant "to encourage people to give generously to hurricane-relief groups…" according to the October 13, 2005 Chronicle of Philanthropy (http://philanthropy.com) article entitled "Time Short for Using Tax Breaks to Increase Charitable Gifts." The article claims that "the tax break is significant: usually donors cannot write off more than 50% of their adjusted gross income in deductions for charitable gifts."
Everyone seems to have jumped on the bandwagon about what a wonderful provision this is. The Philanthropy News Digest recently ran a story which reported that "fundraisers…are expecting a number of larger donations over the next couple of months, as donors take advantage of (the) new law…"
On October 28, 2005, The New York Times also weighed in on the subject. The article "In Hurricane Tax Package, A Boon for Wealthy Donors" (registration required) says that "the tantalizing prospect (of this provision) has set off a financial scramble among some wealthy donors and charities vying for their dollars." The article even quotes some well-respected planned giving professionals who anticipate that the provision will spur $4-10 billion of additional giving. How they could come up with this prediction is beyond us.
We think they are dreaming. As much as we would love to see this result, let's put this in perspective. While it is true that these provisions could appeal to wealthy older individuals whose incomes may be small relative to their assets, how many people are actually in this position? Our well-respected accounting firm, for example, which has a large number of wealthy individuals in this demographic, does not have a single individual even close to giving 50% of their AGI to charity, and no one has come forth wanting to do so. The New York Times article itself said the AARP is sending a brochure about these provisions to 25,000 of its biggest donors, a number representing only .007% of its 35 million members.
On average, Americans give approximately 2% of their net income (a figure presumably lower than their AGI) to charity. Wealthy donors on average give 5% of their net income! Although it is possible that some people will give amounts of income (or assets) up to 100% of their AGI because of the full deductibility of their contribution, we would venture to guess that there are only a small number of people who are capable of taking advantage of this provision and who will actually do so.
This provision, in our opinion, is form over substance. To us, this looks like another case of Congress trying to appear to do something about philanthropy without actually giving away anything at all. It will be interesting to see if anyone ever measures the efficacy of this provision. If they do, we hope our conclusion about it is wrong.
