by Putnam Barber pbarber@tess.org
The ads generally are pretty simple. A headline asks you to donate your old, beat-up car to charity. A couple of lines of text say something like "Maximum tax benefits. We handle all the paperwork." There's a phone number to call, and the name or logo of a charitable organization. Sometimes there's a footnote that says "running or not (some restrictions apply)."
So you call. And you find that the whole transaction is handled not by people who work for the charity but by people who work for a used-car dealer. To be sure, the charity affiliated with the program gets a small fee, often structured as a royalty for the use of its name. Otherwise, the charity is not involved.
But there are beneficiaries. The used-car dealer gets a car he can resell or break down for parts. And you get to trade your unwanted car for a receipt that can substantiate the gift on Schedule A of your tax return next year-in an amount grossly disproportionate to the public benefit such a donation might support.
There are two troubling things about these deals. The first is the way they are structured to wink at a petty form of tax fraud. The second is the way the benefits from car donations are focused on the donor, not the charity in whose name the deals are done.
A bill now making its way through the California Legislature is aimed at cracking down on excessive tax deductions taken for cars, as well as for boats and airplanes.
The bill, sponsored by state Sen. Patrick Johnston, would require a charity to provide a receipt to the donor that described the condition of the donated vehicle. If the charity chose to provide the receipt after the date of the gift-and eventually sold the property to a dismantler-then its receipt would also have to state the amount that the dismantler paid the charity. The donor would not be required to use the sales figure as the charitable-contribution deduction, but would be expected to factor in that information.
Other states may follow California's lead and take up similar legislation.
Despite the possible loss in donations that could result if such measures are enacted, charities should actively support them. Nothing less than their reputations are at stake.
At the heart of the car-donation issue is the encouragement and use of "blue book" figures to assess the value of a donated car. The "blue book" is a periodical that auto dealers use to look up the current resale value of cars. It is based on the results of actual transactions between real buyers and real sellers.
That average is a pretty good statistic to use to characterize those kinds of sales. Why? Because real buyers and sellers are in a strong position to assess whether the condition of the car whose tires they are kicking is better or worse than the average of cars of its make and they can adjust its price up or down before shaking hands.
But those statistics have nothing to do with what's really happening in car-donation transactions. In those, the dealer is getting the car without shelling out any cash at all. The charity is getting some revenue without spending any time on the deal. And the donor is getting a tax deduction that at best is larger than the actual return to the charity-even if he or she resists the obvious encouragements to neglect some of the car's embarrassing little flaws and overstate its value.
What's more, a powerful adverse selection process is at work in the market for donated cars. The ads say as much: "running or not." It doesn't take a Ph.D. in economics to predict that the average value of the donated cars is going to be lower than the average value of the ones that are sold.
Indeed, a statistician might predict that the gap will grow wider as car-donation programs become more and more successful. That is because as a larger share of the clunkers get donated, "blue book" values will be based more and more narrowly on those cars in relatively good condition.
The focus of donated-car programs on the benefits to the donor is equally troubling. "We pick up," the ad for one program says. "All paperwork done for you," another announces. If dragging the hulk out of your driveway and filling out all the Internal Revenue Service and motor vehicle department forms for you isn't a quid pro quo, I don't know what is.
Requiring the receipt to show the actual amount the charity receives as a result of each donation puts the donor in a strong position to decide whether that method of getting rid of an unwanted vehicle is really worth it. To protect the integrity of the charitable deduction, the same rule should apply to the donation of other big-ticket items where donors' temptation to exaggerate the value of their gifts is reinforced by the existence of published guides to the prices recorded in open-market sales.
The change in the standards for determining allowable deductions is consistent with the way another, more familiar tangle in the fund-raising underbrush has been tamed. Organizers of fund-raising galas must estimate the fair market value of the refreshments and entertainment received by ticket buyers. Any tax deduction is limited to the difference between that amount and the price of admission.
If we don't adopt such a solution for donated cars, charities could end up with reputations no better than those of used-car salesmen.