In the aftermath of Hurricane Sandy, which devastated the Northeast last fall, the Jewish community, as it often does in times of crisis, responded with great generosity and charity. In the two months after Sandy, Jewish federations across North America raised more than $6 million in donations to rebuild devastated communities. The response reflected not only the Jewish values of tikkun olam, but also a basic American value. The numbers of American charities, both religious and secular, that have blossomed over the past century is testament to the generosity of our country. Essential to that generosity is a tax deduction for philanthropic giving. Since 1916, when the first federal income tax laws were enacted, a deduction was included that created an incentive for Americans to make charitable contributions. By lowering the after-tax cost of giving, the charitable deduction encourages Americans to give to so-called section 501(c)(3) organizations that pursue the qualified philanthropic goals of promoting charity, education, religion, science, or similar activities. As important, the tax code exempts such organizations from any income tax liability.
The charitable deduction and the income tax exemption for charities are part of a grand bargain formed between the government and individuals that serves to enhance civil society. The law also grants individuals the freedom to support organizations of their choice and allows these organizations to thrive without undue government interference. Over the past century, the Jewish community has used this arrangement to support vital causes in America and abroad. The rise of federated philanthropy as a means to aggregate individual support for religious and welfare agencies has its roots in the Jewish tradition of “caring for the vulnerable among us.” The nascent tax system in the 20th century gave Jewish philanthropists the opportunity to claim tax deductions for contributions to qualified Jewish charitable organizations and allowed nimble and resourceful Jewish charities to thrive.
Many believe that the 21st-century philanthropic landscape is changing or needs to be changed. Before the economic downturn in 2008, a number of academics and several Washington politicians began to question whether certain charitable institutions, including those in higher education and the arts, really deserved tax-exempt status. A 2007 article that asked rhetorically, “Is Harvard a Charity?”1 noted that the university had an endowment in excess of $35 billion. Similarly, a senior member of the House Committee on Ways & Means, the panel that writes the tax laws, questioned the efficacy of a tax
deduction for contributions to opera houses when so many children in his congressional district lived below the poverty line.
Beginning in 2009, the Obama Administration unveiled a proposal to limit the value of itemized deductions for “higher-income taxpayers” (defined as families with more than $250,000 of income per year). To date, the proposal has received little or no support in Congress, in part due to the active lobbying efforts of national charitable groups, including the Jewish Federations of North America. At the same time, a number of presidential panels, commissions, and think tanks are trying to reform the tax code as part of a balanced approach to reducing the ever-increasing federal deficit. So far, these panels propose only to tinker at the margins, maintaining the strong incentive for charitable giving and recognizing its unique place in the tax system. While some believed that the New Year’s Day 2013 agreement that avoided the “fiscal cliff” would sketch out a broad outline to lower the federal deficit and achieve real tax reform, the agreement is much narrower in scope. It did, however, reinstate a top tax rate of 39.6 percent, and experts predict that it will lead to an increase in charitable giving.2
Over the next several years, the Jewish philanthropic community will face a number of challenges. In an effort to tap revenue lost in the form of foregone tax dollars, Washington lawmakers are likely to continue to examine the charitable deduction and the definition of a charitable organization. The Jewish federations will continue to fight to ensure that tax incentives such as the charitable deduction remain intact. Jewish charities will face the challenge of appealing to a new generation of donors to ensure that the communal infrastructure that we have known continues to attract tax incentivized gifts in the 21st century.
1 Robert Reich, “Is Harvard a Charity?” Los Angeles Times, October 1, 2007
2 Please see “What Does the Fiscal Cliff Deal Mean for Nonprofits?” by Joseph Rosenberg, C. Eugene Steuerle, and Katherine Toran, a study by the Urban Institute Center of Nonprofits and Philanthropy, January 2013.