A Tax Break For Art's Sake Is No Luxury

If you're in Washington, D. C., in the next few months, it's well worth taking a look at a massive exhibit called Art for the Nation: Gifts in Honor of the 50th Anniversary of the National Gallery of Art, which graces the museum's East Wing from Mar. 17 through June 16. Among its glories: a captivating Toulouse-Lautrec dance-hall scene, an important Bierstadt landscape, a dazzling view of Monet's garden, plus works by Bellini, Canaletto, van Gogh, Picasso, Johns, Rauschenberg . . . some 330 in all.

This show should raise anew the question, what price art? In this case, what price to the U. S. Treasury? Sometime this year, Congress will again answer that question, and the outlook, for art lovers, is bleak. Yet even at a time when the Hill has adopted a pay-as-you-go budget system that requires every tax benefit to be offset by a revenue raiser, the issue of art deserves further thought.

OPEN WINDOW. When Congress reformed income tax laws in 1986, it eliminated provisions allowing high-income museum benefactors to deduct the market value of their gift. Instead, they could deduct what they paid for the work--hardly a choice, given the art market boom--or they could use the appreciated value to compute their liability under the alternative minimum tax (AMT). Either way, Congress demolished the incentive to give.

Combined with the reduction in tax rates, the change produced devastating results. Museums saw gifts decline by 50% to 70% in both number of objects and value, says the American Association of Museums. Some promised gifts were withdrawn. Many discouraged donors stopped considering art gifts because the new law's tax consequences are so confusing and uncertain, tax advisers say. Perversely, the law made it more difficult to give gifts of important works that had appreciated greatly than lesser works that hadn't.

Until this year. Last fall, Congress opened a one-year "window" that essentially restored the old tax benefits for 1991--with encouraging consequences. "Museum directors are calling from all over the country talking about gifts," says Edward H. Able Jr., the AAM's executive director. "It's very broad-based, from paintings to a World War II plane given to an aircraft museum." Most spectacularly, the results are on display at the National Gallery. Although some of these gifts would have been donated anyway--the reasons for bestowing art are, after all, as multifaceted as a Brueghel painting--the window clearly helped, says J. Carter Brown, the National's director.

On the other hand, the window will hurt the Treasury, which will lose an estimated $22 million over five years. The amount is minuscule in the context of the $1.4 trillion budget. Even so, Capitol Hill aides say it will be tough to get the tax break for art donations permanently restored. Says an aide to Representative Dan Rostenkowski (D-Ill.), who as head of the House Ways & Means Committee is key to its future: "Rostenkowski remains opposed to giving a tax break to the rich. In this case, the very, very rich."

GAINS GAMES. Fair enough: No one likes tax giveaways for the rich. Yet the `86 reforms let stand several tax breaks for the wealthy, many with high costs and little economic justification. The U. S. subsidizes oil drilling and the sale of broadcasting properties to minorities, for example. And in a bow to the mutual fund industry, those who buy the funds may claim all related investment expenses, even though deductions for the expense of doing one's own stock-buying are limited.

One of the biggest tax gimmicks, according to Robert Willens, a tax expert at Lehman Brothers, is the "forgiveness of gains at death" benefit, which also has its pluses for the living. For instance, when Matsushita Electric Industrial Co. agreed to buy MCA Inc. last year, the deal was structured to allow MCA Chairman Lew Wasserman, 77, to defer paying taxes on his $800 million gain until his death--when taxes on that gain will be lost forever, Willens says. If taxed at the current top rate of 31%, the loss to the Treasury from Wasserman alone is more than $240 million, almost 11 times the cost of the `91 window for art donations.

Yet few of these so-called tax expenditures have enriched the general public as much as museum donations have. Art experts say that 85% of most museum collections come from donations. And while cash donations to museums are still deductible, cash today cannot buy anything close to what it bought 5, 10, or 25 years ago. Meanwhile, the abuses that sometimes accompanied donations of art in the past, when values were inflated, have been largely curtailed by stiff penalties on donors and appraisers.

Even so, many politicians--perhaps more troubled by the perception of this tax break than by the reality--show little support for extending the window. And no one seems to have come up with an attractive alternative. Applying the AMT to half the value of a donated work of art leaves a lot to be desired, as does reducing the list of institutions that qualify as donees to a smaller number to ensure that only the most worthy art gifts are subsidized. As a last resort, some art experts are hoping for a one-year extension of the window, to allow more lobbying.

Then again, the denizens of Capitol Hill might just walk a few blocks to the National Gallery, where they can see some of what the nation is getting for its small loss of revenues. Surrounded by these treasures, they might just conclude that this particular tax break for the rich is one that the nation not only can but must afford.

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