The season of giving is turning into an anxious time for charities and nonprofits worried that efforts to avert the fiscal cliff may limit the tax incentives for making charitable donations.
A group called the Charitable Giving Coalition is flying more than 200 executives from nonprofits to Washington on Dec. 4 and 5 as part of a lobbying blitz to preserve the federal tax deduction for charitable contributions, a target of deficit reduction efforts since President Barack Obama proposed capping it in 2009 to help pay for the health care overhaul.
Coalition members expect congressional negotiators and the Obama administration to consider the idea during the lame-duck session as part of a possible compromise that could raise more revenue from upper-income earners without increasing their tax rates. Curtailing the deduction could raise $219 billion for the Treasury over a decade, according to the Joint Committee on Taxation.
Taxpayers claimed $173 billion in charitable contributions on 39 million tax returns in 2008, the last for which data are available, according to the Congressional Budget Office.
Officials from charities such as United Way Worldwide and YMCA of the USA say limiting the deduction would hurt society’s most vulnerable people by dampening enthusiasm for charitable giving and limiting the services they can deliver to the poor and jobless.
“It’s misguided to think it’s a way of getting more revenue from the rich. The impact will be felt by people at the bottom of the economic spectrum,” said Steve Taylor, senior vice president and counsel for public policy at United Way Worldwide in Alexandria, Va. He said the consequences could be compounded if cuts to federal social service programs get wrapped into a budget deal.
There are several options for changing the deduction. Obama has proposed limiting the value of charitable and itemized deductions for upper-income families earning more than $250,000 to 28 percent from 35 percent. The National Commission on Fiscal Responsibility and Reform advocated replacing the deduction with a 12 percent tax credit, but only for donations above 2 percent of adjusted gross income. Former Republican presidential nominee Mitt Romney proposed a hard cap on all itemized deductions, including charitable donations, mortgage interest and state and local taxes.
The multiple options and intensifying efforts to reach an agreement are prompting nonprofits to warn about dire economic consequences facing charities, universities and some health centers if the deduction is altered.
The National Council of Nonprofits cites projections that Obama’s proposal could reduce charitable giving to nonprofits by as much as $7 billion a year. Economist Martin Feldstein has written that, on average, a 10 percent cut in the cost of making a donation raises a person’s charitable giving by about 10 percent.
Other studies suggest that high-income donors’ commitment to charities and the issues they care about outweigh tax considerations. Only 32 percent of respondents to a Bank of America survey this year cited tax advantages as a prime motivator for giving. Half said they would maintain their current charitable giving if tax deductions for donations were eliminated. The survey polled 700 U.S. households with a net worth of $1 million or more.
Aggressive lobbying to preserve the deduction is relatively new terrain for national charities and their local affiliates, which usually advocate for children’s issues, animal welfare, the arts and other noncontroversial causes. It also potentially pits them against homebuilders, real estate agents and state and local governments, all eager to preserve federal deductions for mortgage interest and state and local taxes.
Some lobbyists say they would support a hard cap on itemized deductions with carve-outs for charitable donations. Their most immediate goal is persuading congressional leaders and rank-and-file lawmakers to consider any changes as part of a broader overhaul of the tax code next year, not as a rifle-shot solution to address deficit reduction.
“It’s become obvious in the last month that the lame duck presents significant risk,” United Way’s Taylor said.
“This is like a sleeping giant waking up,” said Diana Aviv, president and CEO of Independent Sector, a leading coalition of nonprofits. “This is not a case of Chicken Little ... if they lose this deduction, it’s not coming back for a long time.”