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Tuesday, May 25, 2010

Charitable Contribution Subsidies Alter School Funding

Monday's (May 24) San Jose Mercury News included an article - "Flush with $2.2 million success, Cupertino parents share secrets." The article notes that this will prevent 100 layoffs and allow grades K-3 to continue to have just 20 students. This is an commendable effort by the parents. Cupertino is a fairly wealthy part of California where many homes cost over $1 million. I'd guess that the vast majority of the donors will claim federal and state tax deductions for their contributions. This will save them taxes - perhaps as much as 45% of the donation amount.

But who funds that tax savings? Everyone else does. Let's say on average, the federal and California governments are subsidizing or paying 30% of the $2.2 million donated (because the donors will take a tax deduction and at an average rate of 30%, have their taxes reduced by 30% of the donation amount. So, the federal and state governments, are in effect, spending $660,000 on the Cupertino schools. That is a lot of money.

What I'm describing it the effect of tax deductions and credits. While some are to measure ability to pay (such as the standard deduction and personal exemption), others are to encourage certain activities, such as donating to support non-profit organizations. Such incentives or tax breaks, reduce the claimer's tax bill and increase that of others. For the charitable contributions, you can think of the effect being that the government is really making a portion of the donation.

This skews the true amount of government dollars going to K-12. Also, it is the higher income individuals who are more likely to donate and to get a big tax break.

What would be better? Perhaps a donation to your child's school should just not be deductible because of the personal and direct benefit to be derived from the donation. Also, to equalize the tax benefit from donations, a credit could be used in place of a deduction.

What do you think?

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