Time to Reform ‘Rich Get Richer’ Tax Credits

Wealthy individuals can profit from certain “charitable donations” in Virginia. That’s the surprising result of Virginia’s Neighborhood Assistance Program and Education Improvement Scholarship tax credits, both of which allow “double-dipping” – a 65 percent tax credit on top of federal and state deductions for charitable giving. When that 65 percent credit is combined with the federal and state deductions, many wealthy individuals who are subject to the Alternative Minimum Tax or who donate appreciated securities are able to save more money in avoided taxes than they actually donated to the charitable cause.

And the amount of money that Virginia is paying out to these mostly wealthy “donors” is significant. The Neighborhood Assistance Program tax credit costs Virginia $17 million a year. The Education Improvement Scholarship tax credit currently costs about $10 million a year, and it could increase to $25 million a year.

Virginia’s legislators appear to be considering reforms to at least one of these tax credits. On Tuesday, the Joint Subcommittee to Evaluate Tax Preferences discussed the Neighborhood Assistance Program credit, and several legislators raised concerns that setting the credit as high as 65 percent means state dollars are providing a huge subsidy to certain donors and charitable causes, while not helping others at all. Legislators also raised concerns that the generosity of these tax credits may distort charitable giving, thereby hurting other causes.

Although Virginia is not alone in having tax credits for wealthy individuals that are so generous that “donors” can turn a profit, the state is unusual in allowing “double dipping” by taking both the state tax credit and charitable deduction. Virginia is also unusual in allowing the donation of appreciated securities, which allows wealthy individuals to avoid paying capital gains tax as well as receiving a generous tax credit and deduction.

Proponents of these credits are not hiding the way wealthy people can turn a profit on these “donations” – several advertise that fact in materials they distribute to potential donors. Wealth management firms are also spreading the word of how to turn a profit at the public expense using these credits.

Virginia’s charitable organizations do vital work, and the generosity of Virginia’s families and businesses in supporting that work is commendable. When Virginia legislators created Educational Improvement Scholarship tax credit and increased the credit amount for the Neighborhood Assistance Program, it’s unlikely that they intended for wealthy individuals to be able to turn a profit on them.

Reforming these expenditures of taxpayer dollars by reducing the credit from 65 percent to a more reasonable amount, and disallowing the practice of double-dipping, would create a more level playing field for Virginia’s charitable organizations, end the distortion that allows wealthy people to profit from their charitable giving, and save the state money.

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Budget & Revenue