Senate Finance Committee chairman Max Baucus and ranking minority member Orrin Hatch have issued a bracing and unusual challenge to their colleagues: make the essential case for any and all tax breaks — don’t assume that the home mortgage interest deduction and state and local tax deductions will continue indefinitely.
We can expect defenders of the charitable deduction to base their defense on the many and varied good causes that benefit from the annual $300-plus billion in charitable donations, estimated by the Office of Management and Budget to divert from the Treasury some $50 billion for fiscal 2013: for medical research, museums, food pantries, hospitals, universities, and thousands of religious institutions.
The case for the charitable deduction, however, should go beyond specific good causes. It is, at bottom, an acknowledgment of the limits of what government can foresee and do well. But it’s also a case that is increasingly hard to make, because of how the world of charitable nonprofits has changed over the past generation.
The Baucus/Hatch challenge should also become an occasion for those in the nonprofit world to reflect on how they do business today — and just how intertwined they’ve become with government.
I first learned to appreciate the value of what some call the “independent sector” in, of all places, Hong Kong, where, despite its small-government reputation, social service groups depend entirely on government “subventions” or subsidies — and must comply with rules for how to serve those whom they help.
What would happen, I asked Hong Kong officials, if an unanticipated problem arose? What if someone had a better idea about how to help those in need? They scratched their heads before replying that they supposed they would have to rely on “non-subvented organizations” — meaning organizations that sprung up spontaneously to deal with new problems, or old problems in new ways, without government help.
The charitable tax deduction allows America to do just that. It allows us to avoid the central planning of social services or cultural institutions, and look instead to the serendipity of millions of private donations and the “social entrepreneurs” whose novel ideas they support.
I think here of groups such as the Boston-based Beacon Hill Village, which was among the first in the country to recognize that modest forms of private assistance could allow the elderly to continue to live independently. This “village” approach has now spread to more than 90 locations across the country.
There’s also the Burlington, Vermont-based Volunteers in Medicine (VIM), which realized that even “universal” health care will not provide services to non-citizens or those who eschew insurance. VIM has created a national network of clinics that rely on retired and volunteer nurses and physicians to serve such patients.
Then there is Austin, Texas-based English at Work, which realized that immigrants hoping to learn English often had no time for classes at community colleges, but could learn at their workplaces, where their employers would even pay for the help.
These groups, and many others, have one key thing in common, relevant to the current tax reform debate: They do not rely on government funding.
In this, they differ from a great portion of the nominally “independent” nonprofit sector. The Urban Institute has estimated that, as of 2010, governments at all levels directed more than $100 billion to some 33,000 human-service organizations. In other words, the so-called independent sector is not so independent anymore.
Quite simply, it is far more difficult to defend the charitable tax break when so many nonprofit groups rely on government funding. They get both tax money and a tax break for their donors. Does that make any sense?
Far better to reserve the charitable tax deduction for those groups that do not rely on government — who get, say, no more than a quarter of their income, at most, from government contracts. That way, we can use our philanthropic dollars to help those pursuing new ideas through unconventional approaches. Think here of Peter Thiel, the PayPal billionaire who almost single-handedly changed the national conversation about the value of a college education when his foundation began to give $100,000 grants to students willing to quit school to start new businesses or non-profits.
Instead of directing money to established organizations that are already pulling in government grants — and often not performing effectively — a reformed charitable deduction can fuel what amounts to a national non-profit venture capital fund and the revival of a truly independent, independent sector.
