Charity at Work: Proposing a Charitable Flexible Spending Account

Abstract

The charitable income tax deduction needs work. The current federal system of tax law to encourage the shift of assets from private individuals to charitable organizations fails to reach significant portions of Americans. Only the fortunate third of households that itemize deductions are eligible for a tax benefit. Not all donors are equal in the eyes of the law; donors with particular demographic characteristics, ranging from income to race to state of residence, are more likely to itemize than others. Although it aims to reflect a pluralistic society, the charitable deduction sanctions the privileging of one-third of American voices over the rest.

Despite its shortcomings, the charitable deduction has many laudable goals and accomplishments and should be enhanced rather than abolished. What the itemized deduction for charitable contributions needs is a supplement to extend its benefit to taxpayers who do not itemize. This supplement is a Charitable Flexible Spending Account (CFSA), modeled after the popular Medical Flexible Spending Account, which could be made available to all workers. Under a CFSA, employers could offer an extension of their cafeteria plan benefits to all employees that would allow them to set aside a pre-tax contribution to use for charitable contributions. The benefit would be available both to taxpayers who itemize and those who do not, with itemizing taxpayers choosing whether to participate in a CFSA or to take the traditional charitable income tax deduction.

A Charitable Flexible Spending Account, working alongside the charitable deduction, will complement the existing tax structure to provide incentives to make charitable gifts in a way that achieves vertical equity not attainable by a structure consigned to itemizing taxpayers. Expanding the benefits of the deduction to include lower-income taxpayers (and the many others who do not itemize) enhances the pluralistic benefit of the nonprofit sector and contributes to greater diversity and democracy in philanthropy. The Article concludes by recommending specific guidelines for implementation by employers as well as actions Treasury could take to support this new philanthropic alternative.

Keywords: charitable deduction, tax, philanthropy, charity, flexible spending account, FSA, employee benefits

JEL Classification: K39