My brother is running for local office in another state. I cannot vote for him but as a devoted sibling I’ll donate money to his campaign. As a resident of Michigan, I get no tax benefit for making small contributions to candidates, but givers in other states can claim tax credits or deductions that help offset their political donations. And it got me wondering: Can tax policy encourage more individuals to make small donations to political campaigns?
Is a tax incentive the answer?
According to Open Secrets, polling shows that less than 10 percent of Americans have ever given any amount to candidates for any office, at any level. When people do give, most political donations are large, given by a few relatively wealthy people. Generally, only a small minority of total contributions come from those who give $200 or less.
Count me among those smaller donors who has given a bit here and there to campaigns. Political donations are not tax deductible on federal returns. While there is no tax benefit in Michigan or in my brother’s home state for giving to federal, state, and local candidates, several other states do offer varying tax benefits for political donations.
A state can offer a tax credit, refund, or deduction for political donations.
The Brennan Center for Justice keeps track of these tax incentives for political donations and recommends a small donor tax credit system that could apply to local, state, or federal races. While out-of-state contributions (like the one I give to my brother) do not benefit from state tax breaks, several jurisdictions already provide credits or deductions to residents who give to candidates in their states.
In Arkansas, a taxpayer who makes a cash contribution to a candidate for state or local public office, an approved political action committee (PAC), or a political party in the state can receive a nonrefundable individual income tax credit of up to $50 ($100 if filing jointly).
Ohio has offered a nonrefundable credit for years for contributions for state and local elections. In 2006, 63 percent of donors who used the tax credit had annual incomes of less than $75,000. In Oregon, a taxpayer can claim a similar nonrefundable credit for donations to candidates or political parties for state, local, or federal office, or to a Political Action Committee (PAC). Montana taxpayers can deduct up to $100 from taxable income for donations to federal, state, or local candidates, political parties, or to a PAC.
But deductions such as Montana’s may be of limited value following the passage of the 2017 Tax Cuts and Jobs Act. The law significantly increased the standard deduction and limited the deduction for state and local taxes, so fewer than 10 percent of households will itemize on their federal returns. For a tax break such as Montana’s to be widely used, states would have to allow taxpayers to itemize on state returns, even if they take the federal standard deduction.
In Minnesota, a registered voter can claim a Political Contribution Refund equal to her donation to a state-level candidate or Minnesota political party up to $50. Joint filers can claim up to $100. In 2009, about two-thirds of candidates surveyed said that the state’s tax credit program brought in new donors. One interesting finding is that the program has issued more refunds to those who gave to incumbent office holders than to challengers.
What about just giving people tax dollars to donate to candidates and their campaigns?
In 2015, voters in Seattle, Washington, approved a 10-year property tax increase estimated to generate $3 million annually to fund “Democracy Vouchers.” Every city resident aged 18 or over gets four $25 vouchers to contribute to local candidates’ campaigns, including their own. In 2016, the number of donors tripled to 18,000 and the number of new candidates for local office increased. But given that a half-million residents got the vouchers, the vast majority did not use them. In addition, half of the $2 million in program costs went to administrative expenses.
Seattle plans to continue the program, assuming it survives a lawsuit. Two property owners are suing because they believe the program violates their constitutional right to free speech by forcing them to pay property taxes to support candidates they don’t like.
For what it’s worth: “Democracy Vouchers” = Public Financing
The other alternative for taxpayer-funded support for political candidates is public financing. Currently, 14 states offer a public financing option for campaigns. The National Conference of State Legislatures explains that in those states a candidate can accept public campaign money if she promises to limit how much she spends and how much she receives from any one group or individual.
But public financing has been a disappointment to its supporters. Even where it is available, it is the least-used method of raising money. Consider the Presidential Election Campaign Fund. On federal tax forms, taxpayers can check a box to direct $3 to the fund, the sole source of public money for presidential campaigns. Today, about 4 percent of taxpayers check that box. The current fund balance is $369,168,988. In 2016, the fund disbursed only $3,474,862. That year, presidential candidates spent $2.4 billion.
Why is the fund barely used? Candidates do not have to participate, and most don’t since they prefer to operate outside the spending limits associated with the fund and can raise far more money from individuals, political action committees, unions, political parties, and corporations.
What’s an individual small donor to do?
Admittedly, political participation often is driven by factors other than tax policy. In 2016, a political outsider initially relying mostly on free media ran for president, won, and dramatically changed government. In 2018, lots of small donations—the vast majority unsubsidized—may have helped change the landscape in Congress and state and local governments again.
But in some states tax incentives may be helping to increase both the number of candidates and their small donors. The trick to their broader appeal may be for states to do more to make sure individuals know about the tax benefit and make use of it.
It’s a new year, after all, with new habits to be made and new trends to follow. It wouldn’t hurt to encourage more people to put their money where their votes are.
The Tax Hound, publishing once a month, helps make sense of tax policy for those outside the tax world by connecting tax issues to everyday concerns. Have a question or an idea? Send Renu an email.
