Could change in tax code bring transparency to charity fundraising?

A few weeks ago, we took a step back from our America’s Worst Charities investigation with the Tampa Bay Times and highlighted some of the key areas where regulators are falling short on charity oversight. Our goal: Facilitate discussion around ways to fill the gaps.

Outside the regulatory sphere, experts have proposed other concrete ideas that could help prevent bad actors from squandering your donations.

Take, for instance, a change to the tax code. With tax reform being debated in Congress, lawmakers could target the charitable deduction when they begin their overhaul in the fall. The Senate Finance Committee already has outlined challenges and potential goals for reforming the rules for tax-exempt organizations and boosting accountability and oversight. 

With that debate in mind, William Josephson, the former head of the New York attorney general’s charities division, suggests that amending the tax code could be a way to prevent abuse by professional fundraising companies that solicit hundreds of millions of dollars on behalf of charities – and then keep a large percentage of what they raise.

As we revealed in our series, the nation’s 50 worst charities have paid their solicitors nearly $1 billion over the past 10 years, money that could have gone to charitable works. And those tax-exempt donations add up to a lot of taxpayer-subsidized activity for these for-profit companies.

Experts say good charities should spend no more than 35 cents to raise a dollar. Our investigation identified hundreds of charities that regularly give their solicitors much more for their donation drives – often at least two-thirds of the take.

But what if charities were required to tell donors how much of their donation actually went to the charity after deducting fees from for-profit fundraisers? In an article published last month in the Exempt Organization Tax Review, Josephson outlines an amendment to the tax code that would let donors claim only the funds that actually go to charity as tax deductible. Charities would be required to inform donors how much of their contribution went to the organization – and how much went to fundraisers.

It’s currently illegal to force fundraisers to disclose how much of a person’s donation goes to charity. The U.S. Supreme Court has ruled that such a disclosure would be a violation of free speech. But under Josephson’s proposal, if 90 cents of a $1 donation is kept by an outside company, only the 10 cents that makes it to charity would be tax-exempt. If a donation is not tax-deductible, that fact must be disclosed to a potential donor.

Josephson isn’t alone in his call for a change to the tax code regarding charitable deductions. Brian Mittendorf, associate professor of accounting at Ohio State University’s Fisher College of Business, argues for a similar need in a recent column in The Chronicle of Philanthropy. Mittendorf emphasizes the same key concepts: giving donors more information before they donate and preventing taxpayers from subsidizing inefficient fundraising.

Would this approach better inform consumers and increase transparency of charities’ use of for-profit fundraisers? What impact would it have on charitable giving as a whole?

Critics of Josephson’s proposal say it could impede legitimate fundraising efforts that are costly, such as attracting new donors or trying to revive lapsed donors.

Robert Tigner, general counsel for the Association of Direct Response Fundraising Counsel, points out that charities might have strategic reasons to run money-losing campaigns. It wouldn't make sense to penalize charities for decisions that might take a couple of years to pay off, he said.

James Fishman, a professor at the Pace University School of Law, has similar concerns that such an amendment would harm smaller charities. For newer nonprofits with unpopular or unknown causes, a push to get their message out and attract a donor base can be costly, especially without in-house resources.

According to Fishman, Josephson’s proposal conflates expensive fundraising with fraud. “High fundraising costs usually are a different issue from fraudulent activity,” Fishman said. “It’s hard to draw a bright line between the two.”

He instead proposes the creation of an agency within the Federal Trade Commission that would have the power to discipline fundraisers that violate state standards and ban them from the industry.

Fishman’s insights on fundraising expenses also echo a growing call from several key groups in the nonprofit world – including Charity Navigator, GuideStar and the Better Business Bureau’s Wise Giving Alliance – to denounce the use of overhead costs alone as an indicator of a charity’s effectiveness.

That notion has a new legal challenge at the state level – one that bears resemblance to Josephson’s proposal. In June, Oregon passed a first-of-its-kind law that denies donors the state income tax deduction for contributions to charities that spend more than 70 percent of donations on overhead and fundraising costs. Charities that don’t meet that threshold will be required to disclose their status to potential donors or face civil penalties.

With Congress poised to tackle tax reform in the fall, do you think an amendment to the charitable deduction as outlined by Josephson is something that should be considered? Should Oregon’s new law serve as a model for other states that seek to protect consumers from bad actors in the charity world? What kind of impact would these approaches have on charity fundraising? Share your thoughts in the comments.

Kendall Taggart contributed to this report.

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