Sunday, March 15, 2009

Arts and the Charitable Deduction

Sorry about the delay. I blame technical difficulties with the computer. I recently received an E-mail from my son, Vastine, concerning funding for the Arts and the charitable tax deduction. It is worth reproducing here. I plan to follow up in a few days with another discussion concerning the charitable deduction. Here it is:


Arts advocates like to point to the funding of the National Endowment for the Arts to demonstrate how poorly our government supports the arts. In the textbook I use in my introductory theatre class, the authors compare the funding for the NEA with the governmental support for the arts provided by other countries to demonstrate what they see as an indefensible lack of federal support.

It may be shocking to learn that the level of federal support for the arts in the United States is most likely the highest in the world. To understand why you need to know how non-profit arts are funded in the United States. Approximately 50% of the financial support for the arts comes from earned income and another 10 % comes from non-federal government support. The final 40% of arts funding comes from private donations. It is this 40% where the US government makes its true impact on the arts. Depending on the donor’s tax bracket, up to 35% of individual donations are funds diverted from the US Treasury to the arts through tax deductions. This amounts to a multi-billion dollar investment by the federal government each year. While many are unaware of the largess of Uncle Sam via these deductions, the fact has not escaped our current administration.

There is a proposal by the administration that is currently in committee that makes significant cuts to the tax credits given to the top income bracket for charitable donations. Currently, someone who is in the 35% tax bracket can deduct 35% of their donations to officially designated non-profits. In the current bill the most donors can deduct is 28%. This differential will make monumental changes to the giving patterns of our largest donors. As Bob Lynch, the President and CEO of Americans for the Arts, recently said on NPR, our system of arts giving is based on “incentives”. Lynch goes on to say that a little incentive would add a “massive additional blossoming of private donations…”

Note that these changes have no affect on the final take home pay of the top tax bracket. It only affects where the tax money goes. In fact, in a perfect arts world, the deduction rate would rise with the planned elevation of the top bracket to nearly 40%.

Now all of these numbers have asterisks and provisos so this is a very general explanation of the changes. On the web you can find a few news articles that go deeper into the mechanics of the changes. But the best way to demonstrate how much money the administration expects to raise with this change to the donation cap is to look at what it plans to do with this money. One of the centerpieces of the new administration’s legislative agenda is healthcare reform. It is an ambitious plan to restructure the American healthcare system while providing health coverage to the tens of millions of uninsured. Peter Orszag, director of the White House Office of Management and Budget, told CNN’s John King that the new health plan will be “budget neutral”. In other words, this massive new program will not add to the deficit. He said that there are two components to financing health reform. Part one will be eliminating waste in the current healthcare system. Orszag said the other part would come from the lowering of the deduction cap for charitable giving. Think about it, there will be enough money returned to the US Treasury from the reduction to charitable deductions to be one of only two components for financing healthcare reform.

I think the majority of Americans recognize the need for a healthcare reform that would provide for the uninsured. The problem is that this plan pits non-profits against healthcare. I believe this a tragically miscalculated approach. Already thousands of worthwhile groups are lining up to receive their allocation of the nearly trillion dollar budget non-neutral stimulus plan. At the same time, non-profit organizations have been lumped together with the oil companies, the healthcare industry and the rich are those responsible to pay for it. We need to get in the other line.

With the devastation to the funding capabilities of foundations caused by the halving of the stock market, the plummeting of the aggregate take-home pay of the American worker due to job cuts and the marked reduction in business income in this failing economy, the giving base in the United States is in the process of being decimated. When individuals face a diminishment of their giving capabilities they not only reduce donations but they also reassess their giving priorities. The arts have traditionally found themselves behind religious institutions, educationally focused charities and other worthy non-profits on the priority tree. Instead of cutting back the percentage of their giving to each of their favorite charities in equal proportions, many donors limit the number of groups they give to. The church and the alma mater beat out the little theatre on the corner almost every time.

We in the arts world permanently reside near the line between survival and failure. One of our greatest talents is the ability to make a lot out of a little. At the same time, a small loss in income can be catastrophic. There is no way around the fact that there will be major damage to the arts world during this economic crisis, it cannot be avoided, but if the changes in the tax code proposed by our government are enacted we could see an unimaginable devastation of the arts community.

So why have our arts leaders been so quiet? There is a genuine feeling among most in the arts world that the new Obama administration represents a needed new direction for our country. One of the first acts of the new administration was to increase the underfunded NEA budget by $50 million and there is a further $10 million in the Omnibus Bill. But that pales in comparison to the loss of billions. This is not a Republican or Democratic issue, this is an arts issue.

A. Vastine Stabler

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