Cap On Deductions Proposed Again

March 4, 2014       Mark Hrywna      

For the seventh consecutive year, President Barack Obama has proposed a cap on all deductions, including charitable deductions, for higher-income individuals.

The proposal, released today within his Fiscal Year 2015 budget that begins Oct. 1, would cap all itemized deductions at 28 percent high earners, affecting the top 3 percent of earners. Previous proposals suggested a cap for married couples earning more than $250,000 annually.

“We are disappointed that the president has, for at least the seventh time, proposed to cut the charitable deduction,” Alliance for Charitable Reform (ACR) Executive Director Sandra Swirski said in a statement released about the proposal. “Capping the charitable deduction at 28 percent could cost the nonprofit sector up to $9 billion a year, dealing a big blow to our charities and our economy. The charitable deduction is a lifeline not a loophole and we strongly urge the president to re-evaluate his stance on cutting the deduction,” she said.

The $9 billion was estimated in a study released late last year by the American Enterprise Institute (AEI). Individual giving could drop by more than 4 percent in the first year, with religious giving down almost 1 percent but secular giving down 7 percent.

“Capping it would have a cascading impact on nonprofits and philanthropic organizations,” Council on Foundations (CoF) President Vikki Spruill said in a statement. “If donors have less incentive to give, donations will decline by billions of dollars,” she said.

The budget proposal includes a private foundation excise tax of 1.35 percent. ACR supports the consolidation of the excise tax to a flat tax but prefers a flat tax of 1 percent instead. The current two-rate structure, Swirski said, has the “practical effect of deterring foundations from increasing grants during times of great need.”

The Council on Foundations supports the measure to simplify the private foundation excise tax, believing it will increase charitable activity, but also prefers the 1 percent rate proposed in Camp’s legislation.

The Charitable Giving Coalition – a group of dozens of nonprofits, including Association of Fundraising Professionals (AFP), Independent Sector (IS) and others – launched the website, ProtectGiving.org last spring after another proposed cap on the deduction.

President Obama’s budget comes less than a week after a wide-ranging tax reform plan released by House Ways and Means Chairman Dave Camp (R-Mich.), which would allow deductions for contributions that exceed 2 percent of a person’s gross income.

The president is required to submit a budget proposal to Congress, which he has done, but it’s “not really going anywhere in terms of being adopted as presented,” said Tim Delaney, president and CEO of the National Council of Nonprofits in Washington, D.C. “This is an election year, Congress passed in December a unique budget for both setting limits for both the current fiscal year and 2015, so we really don’t see this moving forward,” Delaney said.

“The federal government, for better or worse at this moment, is incapable of really acting,” Delaney said, while states are very active, with some enacting caps on tax deductions have impacted giving. “It illustrates the importance of what’s happening at the state level,” he said.

The president’s $3.9-trillion budget proposal for the fiscal year that begins Oct. 1 also includes the Buffett Rule, which imposes a minimum 30-percent tax on incomes beginning at $1 million but does allow for a charitable deduction providing credit against taxes owed. The deduction, however, also is capped at 28 percent.

Meanwhile, the Corporation for National and Community Service (CNCS) hailed the budget. The proposal requests $1.05 for the federal agency, slightly more than the $1.049 billion in the enacted 2014 budget and more than 5 percent over the 2013 enacted level of $994 million.

“At a time of fiscal constraint, this budget demonstrates the president’s continuing commitment to national and community service solutions,” the agency said in a statement released today. The budget would fund a record 114,000 AmeriCorps members and provide new benefits to seniors serving through AmeriCorps.

AmeriCorps State and National would continue to be the highest funded AmeriCorps program at $335 million, which would support almost 75,000 members. However, CNCS proposes to reorganize Senior Corps this year by integrating the Foster Grandparent Program and Senior Companion Program models into AmeriCorps and integrating other competitive grantees into the Volunteer Generation Fund.

Among the largest increases since 2013 would be within the Social Innovation Fund (SIF), which is budgeted for $70 million again this year, compared with $42.4 million two years ago. Up to 20 percent of the funds would be available for Pay for Success projects, according to CNCS.