Should there be a tax deduction for donating to the nonprofit arts?

I was at a seminar today given by Professor Philip Hackney of the University of Pittsburgh School of Law, given (via web) at the Marxe School at Baruch College, on “Tax Policy Toward Arts Nonprofits: Democracy or Plutocracy?” It’s a good question! I won’t try to summarize what Professor Hackney said (if a link to a video recording is ever posted, I will link to it here. UPDATE - here it is). But it sparked me to try to articulate my own take.

I’ve come at this from a few angles in the past - here is an article I wrote for the academic journal Cultural Trends (paywalled, but just send a note if you want a copy), and here is a blog post on how the IRS looks at all this - but in this post I will try to be brief and somewhat systematic.

I think we can break it down into three questions:

One: Should the state be in the business of subsidizing the arts at all? Opinions differ, but I will venture that since almost all cities and states in the US, as well as the federal government, devote some direct funding to the nonprofit arts, even where there are Republican super-majorities, there is a broad agreement (mostly!) that yes, there is some value in doing this. That value is hard to express without being either crudely economistic or vague and handwaving, but that doesn’t mean it doesn’t exist - after all, what we personally value in our favourite works and genres of art is very hard to express in words too. So let’s assume a “yes” in answer to this question.

Two: Should the state be in the business of subsidizing, through a tax break, at least some donations to nonprofit organizations? Here again, I’m going to say the long-standing tradition of doing so, with very little political opposition to it, indicates the answer is, broadly speaking, “yes.” There are opponents - in my home and native land Neil Brooks led a long, and, it has to be said, rather lonely opposition to the practice. He came at it from the political left, and said that charitable contributions were in effect just an ordinary use of income, not fundamentally different from private consumption; if taxation ought to be based upon ability-to-pay, there are no good grounds for giving donors, typically quite well off, a tax break for this sort of expenditure. Goods and services that are truly for the public benefit ought to be financed directly by government, and funded through a progressive income tax that does not give deductions for discretionary use of that income. But, again, I just don’t see elimination of the tax deduction having any sort of political traction in the US (nor was there in Brooks’s Canada).

Three: If the answers to the first two questions are “yes” then should nonprofit arts organizations be included in the 501(c)(3) list of types of organizations that ought to be eligible for tax deductions by donors? It’s hard to see why not. After all, direct government subsidies to the arts indicate the assumption that there is some value from the arts beyond the personal and private, and so it is hard to see why there would be a tax deduction for donations to nonprofit schools, hospitals, animal shelters, and social services but not the arts.

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What then would be arguments against the policy?

One might be that since charitable donations are subsidized through a tax deduction, the rich, who are in a higher tax bracket (which is appropriate!) get more subsidy per dollar donated than a middle income person: If my marginal income tax rate is 40%, then if I give $100 to the Shelbyville Symphony my taxes fall by $40, but if my marginal tax rate is only 20% then when I give $100 to the Symphony I only get a $20 reduction in taxes. Here I do sense some general disquiet. One solution, a very worthwhile Canadian initiative, is to subsidize charitable donations through a tax credit instead of a deduction: Anybody who gives $100 to the Shelbyville Symphony gets an $X tax break regardless of their personal income tax rate. So this is a problem solved fairly easily without much disruption (Canada did the shift from deductions to a credit in the 1980s and it was, as the kids say, nbd).

A second problem is that it is simply wrong to let very rich arts patrons effectively be in charge of where the public subsidy is allocated, rather than through a more democratic process (this was one of Professor Hackney’s main concerns). I’d respond with three points. First, the numbers are such that the dollar value of the arts subsidy delivered through the charitable donation is more than ten times larger than direct government grants to the arts. If someone wants to argue against the charitable donation and for its replacement with greater direct government support, they have to be realistic that there is simply no way that direct support would ever be increased to fully replace the subsidy through the charitable donation. End the deduction, watch donations fall (and they would), but don’t dream that the NEA budget of $200 million (ballpark) is going to increase to $2 billion. The public generally supports arts funding, but not like that. Second, and I know this might be controversial: donors are not the worst judges in the world. They are generally close to organizations, have been ticket buyers, have some sense of their priorities and professionalism. The NEA and state arts agencies do fine work, but it is at a distance. And not all that democratic. How much public input is there into direct government support? Typically the only time the public gets involved is when there is a bad grant. Third, for anyone arguing there ought to be a greater amount of direct government support for the arts in proportion to private donations, I remind them that the President of the United States is Donald J. Trump. You don’t get to say “there ought to be a bigger hand of government in the arts, and also the government has to be one that I like.”

A third problem, which I have seen raised by some arts policy people, is to question which arts organizations are truly “charitable” and which are, well, a bit too artsy, producing works that only a knowledgeable audience would appreciate, out of touch with “the community” and their social needs. Should there be distinctions drawn between which organizations qualify for the charitable deduction and which do not? I don’t think so. The public value of the arts might be in a small community theatre, or it might be in the striving for something far beyond the ordinary in our best and most “elite” artistic institutions. Public policy, wisely, has not sought to say that one sort of thing is deserving of higher subsidy than another: tax breaks for gifts to nonprofits do not make distinctions, and I don’t sense that either the IRS or the state Attorneys General in charge of the regulation of nonprofits have a lot of appetite for getting into the weeds of the specific activities of charities beyond the basics.

An effort to steer arts institutions into becoming social service organizations doesn’t make a lot of sense: existing social service organizations are going to be much more effective at community development than your local dance company, and your local dance company can do something your local social service organizations cannot do - put on interesting and rewarding dance recitals.

Summing up: what arts policy is for is really hard to articulate (I used to take a harder line that arts councils ought to do more to express the purpose of what they are doing, but I’ve softened with age). So our policies for giving public financial support to the arts are going to look vague and maybe imperfect. But when you take the fuzz off the peach, it’s actually hard to find improvements to the current system that would have broad-based support. A rather small-c conservative position, I know. But, with the exception of moving from tax deductions to tax credits, I’m not sure I see a clear way to improve the basic design.