It took a while, but President Obama finally found a way to unite the country. Liberals and conservatives, Muslims and Mormons, Christians and Jews, foundations and donors, hospitals and universities all vehemently oppose his proposal for capping charitable deductions.
Charitable deductions – a link in the supply chain of foundations and non-profit groups -- provide a tax break for the 27 percent of income tax filers who contribute about two percent of gross domestic product to Internal Revenue Service-sanctioned non-profit organizations every year. Obama set off a nationwide alarm recently by proposing to cap deduction for high-income individuals to help pay for his $447 billion jobs bill. Not only is that legislation (at least as written) going nowhere, so is his effort to cap charitable deductions.
For sure, a smattering of tax purists and deficit hawks who attended a congressional hearing last week on the president’s “pay-for” suggested there may be ways to streamline the tax deduction that would both raise more money for charity while reducing the federal deficit. But a panel of religious leaders who called on the government to maintain the status quo drowned them out.
They drew instant support from Sen. Orin Hatch, R-Utah, and studied neutrality from Finance Committee chairman, Max Baucus, D-Mont.
Big philanthropy remains concerned that the “Super Committee,” in its desperation to come up with revenue to help offset the deficit, may target the near-sacrosanct charitable tax deduction. Grassroots non-profit groups have flooded the Hill this month to lobby against the Finance Committee making any changes in the deduction. The committee’s recommendations are due at the end of next month.
“We are concerned that any changes made to the tax deduction will not be well thought out and will not consider the impact they will have on charitable organizations,” said Sandra Swirsky, executive director of the Alliance for Charitable Reform. The alliance is an arm of the Philanthropy Roundtable, whose leadership is meeting later this week to discuss the contemporary charity landscape at the Phoenician Hotel in Scottsdale, Ariz.
The charitable deduction is caught up in the broader debate about limiting tax expenditures in a way that lowers income tax rates or raises revenue or both. A Joint Committee on Taxation analysis released a year ago said eliminating charitable deductions would raise $230 billion over five years, making it the third largest deduction for individuals after the health benefits and mortgage interest deductions.
But advocates for charities and donors point out that unlike those deductions, which serve as an incentive to over-consume housing and health care on the part of the person taking the deduction, donations to charity provide no personal benefits for the donors other than a write-off. Rather, it is the charity which benefits the most.
Of course, that raises a philosophical question about whether the government should be incentivizing private charity while leaving it in the donor’s hands as to which charity will be the recipient of his or her munificence. According to a recent CBO report, the top 9 percent of income tax filers earning over $200,000 a year contributed 42 percent of the $173 billion in charitable contributions in 2008. The same report pointed out that most deductions by lower-income individuals go to religious-affiliated charities, while upper-income individuals are more likely to give to hospitals, research, universities, and the arts.
The non-profit sector in America now constitutes about 10 to 11 percent of the economy, and its individual organizations are not always disentangled from the interests of their donors. No less a philanthropist than Bill Gates, the founder of Microsoft, took a public relations pummeling for his earliest effort when the Bill and Melinda Gates Foundation took up the cause of education and bringing computers into schools. In the past decade, it has focused extensively on global health.
Washington is an epicenter for ideologically-oriented philanthropy. The capital is filled with non-profit think tanks, especially on the right, whose ideologies reflect the political and economic interests of their major donors.
Many health charities are a product of the personal interests and health history of their founders. The Milken Foundation’s support for prostate cancer research and patient advocacy is a typical example.
“Bill Gates has one preference, and Andrew Carnegie had another,” said Diana Aviv, president of Independent Sector, which closely monitors and represents the non-profit sector. “If government gets that money, there is still the question of whether the government will wind up spending that on the public good.” Aviv sits on the advisory board for the Peter G. Peterson Foundation. Pete Peterson is the publisher of The Fiscal Times.
Proposals for changing the deduction last week steered clear of those philosophical debates, and were largely motivated by a desire to help the government close its yawning budget deficit. “Charities are more dependent on grants from government than they are on gifts from individuals and foundations,” pointed out Eugene Steuerle, a senior fellow at the Urban Institute, who offered a broad program for reforming the deduction at last week’s hearing. “All sectors of society have a lot at stake in resolving the fiscal problems of our government.”
Fee-for-service is the single largest financial support for non-profits – about half of all revenue. Government grants provide another 30 percent. Charitable contributions are just 12 percent, with investment income accounting for the remainder.
Steuerle called for prohibiting deductions for the first $500 for individuals and $1,000 for families, since most economists believe this would not affect giving; better policing of in-kind contributions, since the value deducted often far exceeds the actual cash delivered to charities; and adjusting the foundation pay-out rules to even out giving over the business cycle.
The CBO report, which used data from the 2006 tax year, said adopting a floor before the deduction kicked in, if coupled with limiting the deduction to a 25 percent refundable tax credit (which would lessen its value for filers in higher tax brackets), would generate an additional $1.5 billion a year for charity. At the same time, it would cut the $1.3 trillion budget deficit by $2.4 billion a year.
Some charity advocates are open to tinkering with the formulas, but say it has to be rigorously researched with the latest data – something that’s not likely to happen between now and when the Super Committee makes its report before Thanksgiving. “There are some real possibilities there,” said Aviv of Independent Sector. “But any adjustments have to be done in a way where it won’t depress giving.”