It’s time to reconsider who gets charitable tax breaks, both givers and receivers

An inflection point is a time of significant change; a turning point.

Right now, the very way philanthropy works in the U.S. is being critically examined by a growing chorus of experts and scholars who are challenging some of the basic assumptions that underlie giving. The tax code, lack of accountability and transparency, scant government oversight, the outsized opportunity to influence public policy, media adulation of megadonors and more are causing many to question whether a major restructuring of the philanthropic sector is warranted. Here are two striking examples:

Religious institutions don’t file tax returns

In 2019, 29% of all U.S. giving, $128.17 billion, went to religious institutions. Those donations were tax-deductible, resulting in billions of dollars of lost federal and state tax revenue. Unlike nearly all other nonprofits, however, religious nonprofits are not required to file annual tax returns revealing how the donations were spent. Those expenditures may include leaders’ salaries, benefits and other perks, property holdings, investments, sources of revenue and other facets of the nonprofit’s operation and management.

Although most of us believe that the majority of the 300,000 religious institutions in the U.S. follow the law and are doing good work in, and provide value to, their communities, there is no way to factually evaluate that claim.

With little government oversight and zero transparency, religious giving has led to some stunning abuses. For example, televangelists raise millions of dollars for their churches without any clear tax code definition of what a “church” means, and no requirement to report how the money is spent, including on enormous salaries, extravagant lifestyles and homes, fancy cars and private jets.

Moreover, in most cases, religious institutions are exempt from paying property taxes, depriving local governments of badly needed income to provide essential services such as public education, law enforcement, fire protection, etc. Studies estimate that American churches own approximately $300 billion-$500 billion in untaxed property. New York City alone loses nearly $627 million in annual property tax revenue because of exempted churches in the city. The triple whammy of deductions for contributions, exemption from paying taxes, and no reporting requirements, leaves us all in the dark about why these organizations deserve such favorable tax treatment.

Donor Advised Funds require no public benefit

Donor Advised Funds are the fastest growing form of charitable spending in the U.S. In 2018, over $121 billion was held in more than 700,000 such accounts. Donors who contribute to DAFS receive a tax deduction in the year in which the funds are donated and then can “advise” the fund holder which charities should receive a donation. In addition to receiving a tax deduction on the contribution, DAF donors incur zero capital gains tax on contributed appreciated assets.

Many observers argue that DAFS are a flawed charitable vehicle, costing billions of dollars in lost tax revenue without any required payback to the public good. Once the funds are placed in a DAF (and the tax benefits are taken by the donor) there is absolutely no payout requirement, ever. Although the annual average payout rate of such funds is in the low 20% range, that number is skewed because some donors direct 100% of their funds to charity, and others none at all … for years.

Recently published books contend that in some cases, philanthropy may actually be doing more harm than good. Rob Reich’s “Just Giving, Why Philanthropy is Failing Democracy and How it Can do Better,” argues that philanthropy undermines democratic values and interferes with aspirations of justice, as wealthy individuals influence public policy without any accountability. Anand Giridharadas’ “Winners Take All, The Elite Charade of Changing the World,” asserts that ultrawealthy donors’ efforts to “change the world” actually help preserve the status quo and obscure their role in creating the problems they later seek to solve. And Edgar Villanueva’s “Decolonizing Wealth: Indigenous Wisdom to Heal Divides and Restore Balance,” argues that contemporary philanthropy has evolved to mirror colonial structures and posits hierarchy, ultimately perpetuating and creating more problems than it solves.

When government entities, including cities, states, schools, universities and law enforcement, are slashing budgets because of decreased tax revenues, it’s time to evaluate philanthropy’s role in our society, and the tax laws that support it, to ensure that there is transparency and accountability in all philanthropic donations, and that they result in an actual public benefit.

Nonprofit of the Month

Rocky Mountain Microfinance Institute creates the space for communities and people of all backgrounds to realize their unique potential through the power of entrepreneurship. RMMFI is a community-based lender viewing entrepreneurship as a system of people, businesses, and community. Since 2008, this inclusive business incubator and microlender has offered entrepreneurs experiencing significant barriers to economic and social mobility a proven path to increased individual and community wealth through business ownership. http://www.rmmfi.org

Bruce Deboskey, J.D., is a philanthropic strategist working across the United States with The Deboskey Group to help families, businesses, foundations and family offices design and implement thoughtful philanthropic strategies and actionable plans. He is a frequent keynote speaker at conferences and workshops on philanthropy. Visit deboskeygroup.com or @BDEBO.