Mina Kimes of Fortune has an article outlining a new approach to reforming the charitable tax deduction:
The CBO found that, if the charitable deduction were changed into a 25% credit with a floor of 2% of income, the government would cut the total subsidy by $11.9 billion a year, while donations would shrink by a mere $1 billion. A 15% credit would raise $24.6 billion, with donations falling by an estimated $10 billion, according to the CBO.
In the long-term, the savings would be significant. The Committee for a Responsible Federal Budget has estimated that changing the deduction to a 15% credit with a 2% floor would save the government $340 billion over the next decade, reducing the subsidy by 60%. Donations, meanwhile, would only decline by 4.9%. (The Bowles-Simpson commission proposed a similar, if slightly more draconian, 12% credit with a 2% floor.)
In addition to saving the government money, replacing the deduction with a credit would also make the system more equitable. All people would be equally compensated for giving to charity, regardless of their tax bracket. A credit would also reward the 70% of Americans who don’t itemize their taxes, which might spur additional donations. [Emphasis added]
Yet Kimes goes on to observe that this approach would likely change the composition of charitable giving in the U.S.:
People who make under $100,000 a year currently allot 67% of their donations to religious organizations, according to the CBO. Expanding the tax break to lower-income citizens would inevitably skew the subsidy toward churches.
This is a bad result. Not because it would compel taxpayers to fund widespread religious donations — though many people would surely oppose such a large subsidy — but because it would be wasteful. Studies have shown that the price elasticity of giving for religious donations is relatively low, which means that people would be unlikely to cut their gifts in response to a lowered tax break. Indeed, many religious donors do not currently claim a deduction.
If the government is serious about saving money, then it should consider exempting religious donations from the charitable tax break. Most people give to churches because they want to, not because they get a tax break for their generosity.
Exempting religious organizations is a political nonstarter. Indeed, the fact that religious organizations would benefit from changing the deduction to a credit might prove an effective political weapon for reformers.
Back in June, Roger Colinvaux, Brian Galle, and Eugene Steuerle of the Urban Institute analyzed a number of charitable deduction reform proposals.