Individual Income Insights: Checking up on Checkoffs

Over the past few months, states legislatures have passed a wave of changes to their tax codes. Along with high impact changes like repealing a tax credit or updating tax brackets, states also quietly make changes to their income tax returns themselves by adding or removing checkoffs.

Checkoffs allow states to provide taxpayers with a quick and easy way to donate to charity. Taxpayers simply “checkoff” a box on their tax form and a portion of their tax return is contributed to a philanthropic cause. While some states like Oregon offer a wide range of charitable causes to choose from, taxpayers in other states may have more limited options. As of 2015, a total of 410 checkoff programs are available nationwide with the most popular programs being nongame wildlife preservation and child abuse prevention.

When checkoffs are readily available, taxpayers appear eager to use them. Of the 41 states that offer checkoffs, almost all of them receive over $100,000 in taxpayer donations and some states, like California, receive several million. The ease of the donation process can be a large factor in how much a state collects. A recent change in TurboTax software that moved California’s checkoffs onto a separate page from general information, may have resulted in a significant decrease in total donations from $3.37 million in 2016 to $1.74 million for 2017, as reported by Bloomberg BNA’s Laura Mahoney (subscription required). The donation decrease caused 12 of 22 charities to miss the minimum contribution amount required to remain on the state’s checkoff list. California responded by introducing legislation to alter the minimum requirement. In the meantime, checkoff-eligible charities like the California Sea Otter Fund are advising taxpayers on how to donate via the existing TurboTax software until it is updated.

More Money, More Problems

Despite the honorable intentions, checkoffs are still subject to some criticism. Although California is concerned about increasing checkoff funds, the state came under fire in 2015 for not properly distributing the funds. After it was reported that almost $10 million in funds went unspent and other charities went months before receiving the donations, California’s senate reevaluated their checkoff program. Similarly in 2014, New York’s Comptroller also found significant delays in fund distribution. In their analysis of the prior 10 years, they discovered that anywhere between 30 to 57 percent of available taxpayer donations went entirely undistributed and remained in their respective accounts.

Illinois, which added additional checkoffs this August, had the opposite problem. According to a 2011 Illinois Times report, Governor Pat Quinn usedcheckoff funds to pay state debts with the approval of the General Assembly. Between 2008 and 2010, Governor Quinn had borrowed over $1.17 million and swept $434,300 from checkoff funds. Though borrowed funds statutorily must be repaid within 18 months, charities that relied on using those funds were forced to rethink their projects and budgets until then. In the case of a sweep—a transfer from a fund with a specific purpose to the state’s general fund—the state is not required to return any of the diverted funds. This means that taxpayer donations for checkoffs like the Alzheimer’s Disease Research Fund, are not guaranteed to be used for their intended purpose. The state borrowed $135,000 from that organization, but did not have to pay back the $112,500 it swept.

Choosing Checkoffs

In addition to monetary issues, states sometimes come under scrutiny for their selection of eligible checkoff programs. Colorado, the first state to offer checkoffs in 1977, added the Family Caregiver Support Fund to its growing list in June. While the state offers a wide range of checkoffs to its taxpayers, some have complained that the checkoff selection process is unfair and based heavily on legislators’ personal connections and interests.

Unlike Colorado, Oregon relies on its taxpayers to choose which funds ultimately appear on their checkoff list, such as the Volunteer Firefighters Association checkoff added this summer. Oregon’s checkoff list is composed of a list of charities that are screened through a prequalification and petition process. Charities must first explain how they plan to use checkoff funds to create benefits for the state that are not already covered under existing programs, and they must also submit a petition signed by at least 10,000 registered Oregon voters. Charities must use checkoff donations only on approved expenses and must apply for recertification every six years. If the charity does not have a combined gross income of at least $1 million the prior year then they will be removed from the checkoff list.

Even as states sometimes struggle with the selection of checkoffs and the administration of funds, the recent state legislative sessions show they are not disappearing anytime soon.

Continue the discussion on Bloomberg BNA's State Tax Group on LinkedIn: How should states decide which checkoffs are available?

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