The Coronavirus Aid, Relief, and Economic Security (CARES) Act made two changes to the charitable contributions deduction: it increased the cap on deductible contributions for itemizers, and it created a new above-the-line deduction for charitable donations up to $300. While the first of these is limited to the 2020 tax year, the latter change is permanent and applicable to taxable years beginning in 2020. Professor Margaret Ryznar has argued that the new above-the-line deduction is good tax policy and supports its extension beyond the current pandemic.
In her brief essay, Ryznar comments on the value of the above-the-line charitable contribution deduction in two contexts. First, she considers the value of the deduction as a policy intervention during the COVID-19 pandemic. Ryznar notes that charities “seeking donations to help during the coronavirus pandemic range from procuring food for school children to locating equipment for hospitals” and argues that such charitable activities are “important supplements to the government response to the pandemic.”
Theoretically, the new above-the-line deduction for charitable contributions could help support charities as they fill important policy gaps during the pandemic. On the other hand, Ryznar identifies one important limitation: “people may not realize that there has been a change to the law on the charitable deduction, which has been below the line in recent years.” She notes that, unlike corporate taxpayers, which often have tax advisors to track such changes, individuals may not learn about the law change until some time has passed. This time lag is a problem “because charitable contributions are valuable for coronavirus-related charities now, even in smaller amounts from people with all levels of income.”
Though Ryznar does not provide a full critique of the above-the-line deduction in this brief essay, one can imagine other reasons why this change may not be the most effective intervention—even if the goal is to support charities during the COVID-19 pandemic. For example, the structure of the charitable deduction conflicts with the need for targeted interventions during an emergency. While tax scholars have long noted that the deduction places few restrictions on which charities are worth funding—deferring to taxpayers to direct contributions to the causes they support—that structure makes the deduction a particularly blunt tool for fighting the pandemic.
If the policy objective behind the changes to the charitable deduction is to subsidize charities that are performing important functions during the pandemic, then a better approach would be to do so directly. In a forthcoming working paper (with Tracy Kaye, Blaine Saito, Edward De Barbieri and Andrew Greenlee), I will soon argue that direct grants to nonprofits are preferable to the deductions included in the CARES Act. By providing grants directly to nonprofits that will perform targeted activities—such as the provision of affordable housing or creation of homeless shelters—the government can increase the likelihood that expenditures will support activities that are most necessary during the pandemic.
But, as Ryznar notes, the pandemic is not the only relevant context for evaluating this change. The second is the non-pandemic world of the future, when businesses are open and we are all gathering at concerts, lounging on crowded beaches, or dining in restaurants, and the unemployment rates have fallen, markets have stabilized, and . . . sorry, I digress. Eventually, the emergency will pass. At that point, Ryznar argues, the above-the-line charitable deduction stands to fill an important gap in the pre-pandemic subsidy framework.
Specifically, Ryznar notes that charities stand to benefit from two distinct kinds of gifts: large donations in sums that may exceed $1 million, and smaller donations that do not. She explains that charities benefit from both categories of gifts—but in different ways. Large, multi-million dollar gifts can help “fund the construction of new facilities,” but smaller gifts “inspire donors volunteering their time as well as donating money.” Ryznar argues that “it is worth creating incentives for both types of giving.”
Larger gifts are already promoted by the itemized deduction, but Ryznar argues that smaller donations should be further encouraged by continuing to allow a limited above-the-line deduction for those who do not itemize. It is worth questioning whether this potential long-term benefit should justify the shortcomings in the immediate policy response. While I am generally in favor of legal changes that make the tax system more equitable or increase the efficacy of pro-social tax expenditures, there is a risk that pushing such agendas in connection with emergency legislation may distract—and divert resources away—from more effective interventions.
I recommend this essay to all tax scholars who are following the COVID-19 policy response, as well as those interested in charitable deductions or tax expenditure policy.