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Sunday, January 24, 2010

Charitable Contributions for Haiti’s Earthquake Victims

Molly F. Sherlock
Analyst in Economics

On January 12, 2010, a magnitude 7.0 earthquake struck Haiti. As of January 20, 2010, 72,000 had been confirmed dead with hundreds of thousands more in need of assistance. The earthquake has left an estimated 1.5 million Haitians homeless. Congress has passed legislation with the goal of promoting charitable donations for the earthquake victims in Haiti. Similar action was taken following the 2004 Indian Ocean tsunami and the 2005 Gulf Coast Hurricanes, when Congress enacted legislation to promote charitable giving to organizations providing aid to victims of these natural disasters. 

On January 20, 2010, the House passed the Haiti Assistance Income Tax Incentive Act (HAITI Act; H.R. 4462), a bill to accelerate the income tax benefits for charitable cash contributions for the relief of earthquake victims. The Senate introduced companion legislation (S. 2936) on January 20, 2010, but passed the identical House legislation H.R. 4462 on January 21, 2010. If enacted, the HAITI Act would allow taxpayers making charitable contributions of cash made to organizations providing aid to earthquake victims after January 11, 2010, and before March 1, 2010, to take the associated charitable deduction on their 2009 income tax returns. A similar provision, discussed in greater detail below, was adopted under P.L. 109-1 following the 2004 Indian Ocean tsunami. The Joint Committee on Taxation (JCT) estimates that the HAITI Act would result in revenue losses of approximately $2 million over the 10-year budget window spanning FY2010 through FY2019. 

Under current law, charitable contributions to 501(c)(3) charitable organizations from individuals, corporations, and estates and trusts are tax deductible in the year they are made. Individuals can deduct up to 50% of their adjusted gross income (AGI), phased-out for higher income individuals. Corporations can deduct up to 10% of their taxable income. Individuals and corporations can carry forward any unclaimed charitable deductions for up to five years. Total charitable giving in 2008 was $307.65 billion. 

In the past, Congress has passed legislation to encourage charitable giving following natural disasters. Following the 2004 Indian Ocean tsunami, legislation was passed that allowed taxpayers making charitable contributions to aid tsunami victims in January 2005 to take the charitable deduction on their 2004 tax return. This provision is similar to the one proposed in the HAITI Act. In September 2005, following Hurricane Katrina, individual and corporate giving limits were suspended. The rules surrounding charitable contributions of food inventory and books were also relaxed to encourage in-kind giving. 

The HAITI Act, like other tax policies, can be evaluated along the dimensions of efficiency and equity. Efficiency is greatest when the policy's marginal impact, the giving induced by the program, is large relative to the policy's inframarginal impact, the benefits given to those whose behavior was not directly caused by the tax policy. Using this framework, the HAITI Act is unlikely to be economically efficient. In general, tax benefits for charitable giving do not appear to significantly increase donations. Furthermore, tax deductions violate principles of vertical equity in that the benefits of tax deductions accrue disproportionately to higher income groups and provide larger benefits to those with a greater ability to pay.

Date of Report: January 22, 2010
Number of Pages: 13
Order Number: R41036
Price: $29.95

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