By: Pete Kennedy

Let’s all first acknowledge that there are no easy ways to solve a $400+ million budget hole.  I think no one envies the General Assembly and their task over the next few days.

I’ll echo Clubber Lang’s famous quote from Rocky III in my prediction of the outcome: “Pain!”

One proposal gathering steam in the halls of Dover (as a part of the personal income tax overhaul) is to eliminate itemized deductions in favor of a larger standard deduction.  Included among itemized deductions are deductions for charitable contributions.  It bears mention this is being considered at the federal level as well.

In a real and direct way, the charitable deduction represents a government subsidy.  It is a back-door funding mechanism for services which provide a public benefit.  If those same services needed to be directly provided by the government itself (federal, state or local), is there any question whether it would be done more or less efficiently and effectively than the private nonprofit sector?

The existence of the charitable sector and the reliance of the public for its services has evolved over several decades of relatively stable tax policy.  Nonprofit organizations provide a web of services: providing food, clothing, health care and shelter to needy citizens, providing higher education opportunities and preserving cultural assets (among many, many worthy causes).

The removal of the itemized deduction for Delaware income tax purposes will remove a portion of the financial incentive for donors to provide resources to those organizations.

So what will the magnitude be?  What will be the percentage reduction in charitable giving?  The only answer available to that is….no one knows.  Donors give for myriad reasons.  Obviously no donor is motivated to give strictly for financial purposes. Under current rules, in all cases the donor would be better off monetarily keeping their dollars and paying the tax on the income. But it is a factor.

The best we might hope for in terms of impact is for it to be immaterial.  In worst case it will factor into many donor decisions either in terms of the magnitude of those gifts or whether they will give at all.

I think of the charitable sector as an ecosystem.  Support comes from several sources; government grants (already under siege), program-related income and private contributions.  As with any ecosystem, there are hidden dynamics – if one piece is changed, there are often unforeseeable consequences.  The individual nonprofit cobbles together its funding, prepares its budget, hires or lays off, expands or contracts and does the best it can.  The support is directly related to the level of services provided. There are already societal needs going unmet due to lack of funding.  If the capacity to provide services is reduced, who will step in?

Some impacts of a drop in charitable contributions would be felt immediately.  But others will take years to become evident.   Reading to a 3-year-old today will improve their academic performance five, 10 and 15 years from now.  A new hospital building or academic facility built today will be available as our children’s children are born and grow old.  Conservation easements donated and cultural assets preserved today will improve the quality of life into the foreseeable future.

Unlike most other deductions, the charitable deduction exists to drive behavior in a positive direction for the benefit of society.  The proposal to remove it is short-sighted in the extreme.  I would encourage the General Assembly to revisit this proposal and preserve the charitable deduction.

This article was originally published in The Delaware Online News Journal .