Why Massachusetts keeps postponing this tax break for charity donations

Back in 2000, over two thirds of Massachusetts voters approved a small change to the state’s tax code: a tax deduction for charitable giving.

The slight change would have allowed residents, who already can claim donations to lower the amount of their income subject to federal taxes, to take an additional 5 percent deduction on their state taxes.

In other words, a tax filer could save $5 on their taxes for every $100 they made in donations; $5,000 in donations could save $250. The new law was purportedly intended to incentivize charitable giving in Massachusetts, which had been recently ranked the third-least generous state in the country at the time.

However, scrambling to address recession-induced budget shortfalls, legislators passed a law in 2002 to suspend the implementation of the deduction, as well as a ballot measure to lower the state’s income tax, until their fiscal situation improved.

That would have been this year.

But in the midst of the pandemic, Republican Gov. Charlie Baker and the Democratic-controlled state legislature agreed last year to delay it until 2022

Now, it will be delayed one more year. And more than two decades after voters first approved the deduction, the debate over if and when it will ever be implemented has spilled over from Beacon Hill to the opinion pages of The Boston Globe.

For this year at least, it seems state lawmakers will have the last word.

“The charitable deduction as currently designed may not be the best use of our resources going forward.”

Following a House vote Wednesday, the Senate successfully voted Thursday to override Baker’s veto of their measure to delay the deduction again until 2023.

Baker argues that — after the additional one-year delay and with state revenues unexpectedly surpassing estimates of $4 billion, or nearly 15 percent — now is the time to promote donation to charities, many of which “helped our most vulnerable residents through the pandemic.”

“As the Commonwealth has a significant budget surplus and billions of dollars in federal aid available, it is time to finally deliver this charitable deduction that voters approved decades ago,” the governor said in a statement to Boston.com, after the Senate completed an override of his line-item veto.

“I am deeply disappointed that the Legislature would deny these front-line organizations a crucial opportunity to generate the resources they need to help families keep food on the table, address substance use and behavioral health challenges, support survivors of domestic violence, and more,” he added.

The Globe’s editorial board echoed that sentiment, writing last week that “if ever there was a year to lend a hand to the state’s nonprofits — everything from community centers and homeless shelters to pandemic-shuttered arts organizations — this is it.”

As the editorial board noted, those groups did get additional help directly through the larger budget that Baker and the legislature agreed to.

“But nonprofits have always depended on a combination of resources, and reinstating the charitable deduction would help keep the private tap flowing,” they said.

It’s not that legislators don’t want to help those organizations.

However, even with the budget surplus, they question if it’s the best — and most effective — use of resources, especially with the Delta variant circulating and the pandemic outlook uncertain.

“While it is true that our fiscal situation has recently improved, we are not out of the woods yet, and the charitable deduction as currently designed may not be the best use of our resources going forward,” state Sen. Michael Rodrigues, the chair of the chamber’s Ways and Means Committee, said during Thursday’s session, according to the State House News Service.

Officials say that delaying implementation would save the state $64 million in revenue this year. But previous estimates have said it could end up being much more. According to the Department of Revenue, implementing the deduction would mean over $300 million in losses a year by 2024.

Left-leaning groups have also questioned how much an additional 5 percent deduction would encourage more charitable giving.

For high-income filers, the federal charitable deduction provides a tax break seven times larger than the Massachusetts tax break would deliver. It is the federal credit that will influence decisions around charitable giving, not the state credit.

They also point out that the savings would disproportionately benefit the wealthy. According to the Massachusetts Budget and Policy Center, more than 50 percent of charitable deduction dollars go to households with incomes over $1 million. Per the group’s estimate, the average savings for those making over $1 million would be nearly $10,000; for those making between $50,000 and $100,000, it would be $36.

In response to the Globe’s editorial, Kurt Wise, a MassBudget tax policy analyst, wrote that the tax break would be “expensive, unfair, and ineffective.”

“For high-income filers, the federal charitable deduction provides a tax break seven times larger than the Massachusetts tax break would deliver,” Wise said. “It is the federal credit that will influence decisions around charitable giving, not the state credit.”

He added that a “$300 million annual hole in the state budget will end up hurting the mission of many Massachusetts nonprofits.”

Bill Walczak, a cofounder of the nonprofit Codman Square Health Center, also argued that deduction proponents have the issue “backwards.”

“Providing another nickel in lowered taxes from the Commonwealth for every dollar donated will not dramatically increase contributions to our community nonprofits,” Walczak wrote in a companion piece to the Globe. “Yes, the state should help nonprofits, but it should fund them directly.”

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