policy and advocacy

Issue Brief: Encouraging Charitable Gifts to Arts and Culture

Support America's Nonprofit Arts Organizations

ACTIONS NEEDED
We urge Members of Congress to:
Incorporate incentives for charitable giving into any broader bill such as tax reconciliation:

• The “Artist Deduction” (H.R. 1120/S. 372), allowing artists to take a fair-market value deduction for contributions of their own works to arts organizations (see Artists’ Fair-Market Value Deduction Brief);
• The “IRA Rollover” (H.R. 1607), enhancing individuals’ ability to roll funds from their IRAs to charity; and
• House Members should also cosponsor H.R. 1120 and H.R. 1607, the stand-alone versions of the artist deduction bill and the IRA Rollover bill.
  Reject a “floor” for itemized deductions for charitable gifts.

TALKING POINTS
The nonprofit arts community seeks to correct an inequity in tax law that harms artists, to expand the tax deduction for charitable gifts, and to enact clearer rules governing some of the more esoteric issues involving gifts of artworks. If enacted, these measures will encourage more charitable giving, including gifts of art, strengthening arts organizations and allowing them to provide more services to the public.

Artist Deduction: Under current law, creators and collectors are treated differently when they donate tangible works (e.g., paintings or manuscripts) to museums, libraries, or other educational and collecting institutions. A collector may deduct the fair-market value of the work, but creators may deduct only their “basis” value—essentially the cost of materials such as paint and canvas. Therefore, creators have less incentive to donate their works. Allowing a fair-market value deduction for creators would serve the public interest by spurring gifts of contemporary art to collecting and educational organizations that use art in their charitable mission. It would also address the inequity of current law with respect to artists vis-à-vis other donors. The Senate has approved this proposal several times, most recently in S. 2020, and as part of the CARE Act in the last Congress.

IRA Rollover: The “IRA rollover” provision would permit donors to make tax-free charitable gifts from their Individual Retirement Accounts (IRAs). Under current law, when a donor withdraws money in order to make a gift, the withdrawal is treated as taxable income, leaving less available for charitable purposes. We have supported the IRA rollover provision ever since it was offered in the 1990s. The House and Senate have each passed it in prior years but it has not come to conference. Most recently, the Senate approved it in S. 2020.

Non-Itemizer Deduction and Itemizer “Floor”:  We support a measure to allow taxpayers who do not itemize their deductions to take a deduction for making charitable gifts. For a short time in the 1980s, such taxpayers could take a limited deduction, but the Tax Reform Act of 1986 ended the practice. We support its reinstatement. The House and Senate each passed a “non-itemizer” deduction in 2003, as part of the CARE Act/H.R. 7. It is also in S. 2020. However, in November 2005, the Senate approved a proposal in S. 2020 to pay for the “non-itemizer” deduction by restricting the itemized deduction. There would be a new “floor” of $210 ($420 for couples) on the deductibility of charitable gifts by itemizers. In other words, the first $210 (or $420) of annual charitable gifts would no longer be deductible. 

While we support the “non-itemizer” deduction, believing that it underlines the importance of charitable giving and would therefore encourage people to become donors, we have strong concerns about the proposed new floor on itemized charitable deductions, which effectively “robs Peter to pay Paul.” The floor violates a bedrock principle that charitable gifts should be deductible from the first dollar given. It also sets an unfortunate course for future congressional action to raise the floor on itemized charitable deductions to even higher levels: over time, a higher floor would erode the incentives in the tax code that promote charitable giving. While we strongly support the expansion of a tax-deduction to non-itemizers, a floor for itemized charitable deductions sets a dangerous precedent. Both the House and the Senate approved the non-itemizer in 2003 without restricting gifts by itemizers. We urge them to do so again.

LEGISLATIVE SITUATION
Congress has tried for several years to find a vehicle to enact charitable tax incentives. In 2005, charitable giving legislation was introduced as H.R. 3908 and S. 1780, both essentially the same as legislation (the “CARE Act”) that the previous Congress had approved by overwhelming, bipartisan margins but had failed to conference. In November 2005, the Senate incorporated major portions of S. 1780 into S. 2020, the tax reconciliation bill, including the artist bill, the non-itemizer deduction, and the IRA rollover. However, it also added the new “floor” on itemized deductions as a revenue raiser. The House version of the reconciliation bill, H.R. 4297, did not include charitable incentives. In mid-February 2006, the Senate agreed to a conference on H.R. 4297, and as this document goes to press, arts advocates are waiting for the outcome.

The artist deduction provision has also been introduced in the Senate and House as a stand-alone (S. 372 and H.R. 1120).  The lead sponsors are Sens. Patrick Leahy (D-VT) and Robert Bennett (R-UT), and Reps. Jim Ramstad (R-MN) and Ben Cardin (D-MD). 

BACKGROUND
The tax treatment of charitable contributions, both from individuals and from estates, has a significant effect on both the amount and the composition of gifts because people give more if they can deduct their contributions. For example, a recent study by the Congressional Budget Office found that, if the federal estate tax had not existed in 2000, charitable donations would have been reduced by a stunning $13 billion to $25 billion that year. America’s nonprofit arts and culture institutions rely on charitable gifts in order to be able to provide services. Furthermore, collecting organizations such as museums and libraries have a special need for “in-kind” gifts of tangible objects such as works of art, because such mission-related gifts are unique and cannot be replaced by an equivalent amount of cash.

Beginning in 2003, the Senate Finance Committee has been investigating a variety of proposals to reform charities.  Some of the proposals—such as a limiting the number of people who may serve on a charity’s board—are impractical. Arts organizations have largely subscribed to a unified position adopted by the umbrella group Independent Sector with respect to reform proposals. Arts organizations were particularly pleased that in 2005 Congress largely backed away from proposals to restrict deductibility for gifts of in-kind tangible property. Certain proposals contained in S. 2020 would make changes in the treatment (though not the deductibility) of in-kind gifts. We refer Congress to positions taken by collecting organizations for detailed discussion of these proposals.