The tow-away tax break: why car donation programs benefit everyone but the charities they're intended to help

Washington Monthly, June, 2002 by Tyler Cabot

PERHAPS YOU'VE SEEN THE FLYERS or heard the ads on the radio: Donate your used car to charity and we'll arrive at your home, arrange the title transfer, and tow away your old clunker, giving the proceeds to your favorite charity. Over the past few years, hundreds of popular charities have launched such programs as a way to raise money, including the Red Cross, MADD, Big Brothers/Big Sisters, Easter Seals, and the United Way. To most people, it sounds like a great deal. Getting rid of an old car is a hassle. Giving it to charity, on the other hand, leaves you with a warm feeling--and a nice tax deduction, too, since the government allows those who donate a used car to deduct its full "fair-market value." So it's no surprise that car donation drives are increasingly popular, especially with civic-minded upper-middleclass types. Who ever said coddled yuppies don't have hearts?

Unfortunately, there's a catch, though you're unlikely to hear about it from television ads, phone operators, or tow-truck drivers. Just because Uncle Sam gives you a $1,000 tax deduction for donating your car doesn't mean that Easter Seals will receive a check in the same amount. The problem with car donation programs is that most of the benefits accrue not to the charity, but to the person who donates a car. So popular are these programs that I didn't have to look far for an example to demonstrate how badly they're flawed. In early March, the editor-in-chief of this magazine, Paul Glastris, bid farewell to his broken-down 1991 Volkswagen Jetta, and donated it to the good folks at the American Cancer Society. Like millions of Americans, Paul liked the idea of helping a charity, and didn't mind the tax break, either. The Jetta was, he admits, "undrivable." It had a burned-out engine, more rust that Michael Jordan's knees, and "what you might call `ever-expanding head and leg room'--the interior molding was perpetually disintegrating onto the passengers and driver," he told me. Paul's mechanic told him that the car was junk.

So he picked up the phone, dialed the American Cancer Society's "Cars for a Cure" program, and arranged for a pickup. Shortly after, he received a receipt listing the car's mileage (80,000) but saying nothing of its woeful condition or estimated worth. (Under federal law, tax deductions are do-it-yourself.) Paul followed the charity's instructions to visit either the Kelley Blue Book or the National Automobile Dealers Association (NADA) Web sites to determine the fair-market value of a '91 Jetta, which in turn determines the size of his tax deduction (for people in the 28-percent tax bracket it's about one-third the value of the car). NADA offers a three-tiered system--High, Medium, Low--to determine the quality and value of a used car. Even a car that rates "low" must be able to pass local inspection standards and run safely. But the giver is the sole determinant of the car's value, so there's nothing stopping Paul, or anyone else, from claiming the low estimate ($2,475), the medium one ($3,425), or even the high one ($4,150). For Paul, that corresponds to a tax break of anywhere from about $700 to about $1,200.

So how close are these figures to the actual value of Paul's dilapidated Jetta? There's no category for "heap of junk," so to find out just what price his car might fetch, I called Insurance Auto Auction, the company that will auction Paul's car. (For cost and convenience, most used cars aren't resold to customers, but auctioned for scrap.) They estimated that a '91 Jetta in the condition described would bring about $100 to $200. In other words, Paul stands to receive a tax deduction approaching $1,000 for a car worth, at best, $200.

But the scandal doesn't end there, because not all of that sum will go to the Cancer Society. That's because most charities don't have the resources to run car donation programs themselves, and instead rely on private fundraising companies to run their program. These companies enjoy a virtual monopoly that lets them extract an exorbitant chunk of the car's value: From that $200, deduct the towing fee, the title-transfer fee, advertising fees, and employee salaries--all before the company even takes its share of the profit. By the time the check for Paul's car reaches the charity's coffers, the American Cancer Society will be lucky to get $100.

Accounting Only Enron Could Love

For all their seeming practicality, donated car programs are one of the least efficient ways to help charities raise money. They also drain much-needed tax revenue. The federal government doesn't track just how much revenue is forfeited in this way--nor do most states--but a study from the California attorney general's office provides a glimpse of just how wasteful this system can be. The study revealed that of the $37 million raised by commercial fundraisers in 1991 through the sale of donated vehicles, only $11.5 million reached charities. The remainder went to the fundraisers. And keep in mind that that $37 million is the money raised by selling the cars--it's a fraction of the amount taken in tax deductions by those who were able to deduct the full Blue Book value of their cars. So the problem is twofold: Charities are victimized by fundraisers to which they're beholden, while the IRS offers tax deductions to raise money that charities never see. Extrapolate California's example across all 50 states and the amount of tax revenue lost is staggering. The federal government is forfeiting hundreds of millions of dollars in tax revenue in order to allow charities to collect a fraction of that sum. It's the practical equivalent of the Pentagon's $600 toilet seats.