Why we need tax reform: Billions in charitable donations aren't helping people in need

Each December, wealthy people rush to donate billions of dollars to maximize their charitable deductions and shrink their tax bill. Unfortunately, loopholes in tax laws mean donated dollars don’t always go to active charities.

Often, philanthropic dollars accrue in funding vehicles — donor advised funds and private foundations — rather than being distributed to worthy nonprofits in a timely manner. Without sufficient rules in place, that money is likely to linger, out of reach of families and neighbors who need help.

All the while, donors reap the benefits of upfront tax deductions for their giving and funds remain sidelined, inaccessible to charities that need them.

The problem with this arrangement has never been clearer. Far too many families are suffering through the fallout of the COVID-19 pandemic. From distributing food to providing shelter to paying for health care costs, charity plays a critical role in our nation’s response to these unprecedented health and economic challenges.

Recently, my home city of Houston replaced our usual Thanksgiving Day parade with a drive-through food bank. Organizers estimated that more than 5,000 families were served in one day.

Charitable resources are struggling to keep up with the demand. In fact, the revenue and resources of charities are declining. One projection shows that about 22,000 nonprofits will close indefinitely because of the pandemic.

Donations sit on sidelines in pandemic

Meanwhile, more than $1 trillion in funds supposedly intended for charities remains unspent. People are hurting. Government resources are stretched to the limit. And philanthropic dollars continue to sit in accounts where they accumulate wealth, apparently waiting for some larger crisis to arise, helping to line the pockets of money managers and investment firms.

Now is the time to change the tax code to ensure that charitable donations are actually spent on charities.

This is why leading voices in the philanthropic community and I have joined the Initiative to Accelerate Charitable Giving. This new coalition is dedicated to promoting common-sense, non-partisan charitable giving reforms that increase and accelerate resources to working charities of all kinds to address the immediate crisis and beyond.

These proposals would ensure funds donated to donor advised funds are made available to actual charities within a reasonable period of time.

Additionally, these proposals would close the loopholes in the current payout requirement for private foundations. Regulations already compel a regular flow of donations from these organizations to working charities, but we need better incentives to promote payouts above that minimum requirement.

Expand tax benefits to more donors

And these proposals would strengthen and expand the non-itemized charity deduction. Recent changes to the tax code have relegated the tax benefits of charitable giving almost entirely to the wealthiest Americans. Opening this opportunity to more households is the fair thing to do and will increase funds to charities — especially smaller charities that don’t usually receive contributions from large philanthropies.

These policy reforms are long overdue, but never before have the stakes been so high. Too many families are suffering. Too many charities lack critical resources. And too many philanthropic dollars remain on the sidelines. It is time to change the laws and better ensure people can get the help they need.

John Arnold is co-founder of Arnold Ventures and a member of the Initiative to Accelerate Charitable Giving.

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This article originally appeared on USA TODAY: Why reform of charitable giving laws would help more people in need