By Richard Rubin
WASHINGTON -- A bipartisan effort to expand tax breaks for charitable donations is gaining momentum in Congress, as nonprofit groups struggle during the pandemic.
Senators, including James Lankford (R., Okla.) and Jeanne Shaheen (D., N.H.), want to let taxpayers deduct charitable donations, even if they don't itemize their deductions. Their plan would greatly increase a small tax break created in March that allowed such extra charitable deductions. Their plan would limit that to one-third of the standard deduction. In 2020, that is $4,133 for individuals and $8,267 for married couples.
The senators, backed by organizations with national clout such as Habitat for Humanity International and the YMCA, are offering their idea as a way to help nonprofits and their middle-class donors. They are pitching it for the next economic-relief legislation, set for Senate consideration next month.
"Their services are most in need right now, as the challenges from the pandemic and the economic fallout are so great," Ms. Shaheen said in an interview. "How can we help them in ways that are going to make a difference?"
Charities are struggling during the pandemic after fundraising events were canceled and the stock market gyrated. Habitat laid off 10% of its staff and cut executive pay. Some religious congregations report donation declines of more than 30% and have lost income from renting space for events, according to the Union of Orthodox Jewish Congregations of America.
"It's like nothing we've ever seen," said Neal Denton of the YMCA, where the national office is reducing its staff from 300 to 170.
The Senate proposal also counters longer-term trends that worry nonprofit leaders, who have seen their donor bases shrinking into a smaller, wealthier group. In 2000, 66% of Americans donated to charities; by 2016, that proportion had dropped to 53%, according to the Indiana University Lilly Family School of Philanthropy's Philanthropy Panel Study.
"That's a disturbing trend from a democratic perspective and a philosophical perspective," said Jonathan Reckford, Habitat's CEO.
The 2017 tax law dealt another blow to charitable giving. By nearly doubling the standard deduction, the law reduced the number of people who have enough deductions to make itemizing worthwhile. The number of itemizers fell to about one-tenth of households from about one-quarter. The top 1% of households now get 58% of the tax break, according to the Urban-Brookings Tax Policy Center.
But some tax experts warn that the senators' expanded tax deduction may be inefficient, directing benefits to people who would give anyway.
"At its core, it's not even getting more money to charity," said Jeremy Bearer-Friend, a George Washington University law professor. "It's a tax cut proposal. Is that what the moment is calling for?"
A deduction of $4,000 for individuals and $8,000 for married couples would increase donors by 7 million, or 8%, according to a 2019 study by the Indiana University Lilly Family School of Philanthropy. But that study found the proposal would reduce federal revenue by $20 billion while increasing donations by just $17 billion.
One concern: Some people who now itemize deductions could save taxes without giving more money. Someone who now makes $3,000 of donations and has $10,000 in state tax payments currently takes $13,000 of itemized deductions. Under the proposal, the same person could get the $12,400 standard deduction plus $3,000 in charitable deductions.
The Indiana University analysis considered other ideas that could be more efficient. One would impose a floor of 1% of income. Under that approach, an individual making $100,000 who donates $5,000 couldn't deduct the first $1,000 but could deduct the other $4,000.
That version of the plan would attract fewer new donors, but the increase in donations would exceed the cost to the government, according to the study. In an interview, Mr. Lankford said he would consider a 1% floor if the proposal were extended for the long term.
Converting the deduction into a credit -- where the donor's benefit doesn't increase with income -- would also shift the incentive toward middle-income households.
Those who get the tax deduction have higher incomes, and the benefit increases as tax rates rise. That means the charitable deduction as currently structured privileges the causes disproportionately favored by high-income households -- such as arts groups and universities -- while disadvantaging religious groups and others favored by middle-income Americans.
The same senators have already nudged policy in their direction. In the economic-relief law passed in March, Congress created a charitable deduction for non-itemizers. But at just $300, the deduction likely is doing little to spur giving, because many people already give that much without a deduction.
But Mr. Lankford has described the $300 deduction as the "camel's nose under the tent," as they build support for the broader idea. Other backers include Sens. Mike Lee (R., Utah), Amy Klobuchar (D., Minn.) and Chris Coons (D., Del.).
Of course, tax breaks aren't the only reason people give to charities. But lawmakers see the tax system as a useful lever for directing money to nonprofits and bolstering civil society, either as a complement to or a replacement for government aid, depending on their political perspectives. Tax breaks affect the size and number of gifts -- as evidenced by the annual surge in December donations.
"That is not the Christmas spirit that does that," Mr. Lankford said. "It's the end of the tax year that does that."
The House of Representatives didn't include an expanded deduction in its economic-relief bill last month. Ways and Means Committee Chairman Richard Neal (D., Mass.) is focused on direct assistance through tax credits and unemployment insurance, said spokeswoman Erin Hatch.
Senate Finance Committee chairman Chuck Grassley (R., Iowa) is evaluating the idea. Sen. Ron Wyden of Oregon, the panel's top Democrat, backs the concept.
Write to Richard Rubin at richard.rubin@wsj.com
