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Charitable Deduction The Focus of U.S. Senate Hearing

By Mark Hrywna - October 19, 2011

How much would charitable giving be impacted — and which donors and organizations would be affected most – dominated a U.S. Senate Finance Committee hearing Tuesday regarding charitable giving incentives. Amid talk of floors and ceilings on tax deductions and potential tax credits, some warned that now is not the time to experiment with tax policy that affects charities while others favored overall tax reform during “Tax Reform Options: Incentives for Charitable Giving.”

President Barack Obama has several times proposed limiting the charitable deduction for those earning more than $200,000 to their tax rate of 28 percent, rather than the current 35 percent.

Sen. Orrin Hatch (R-Utah), ranking member of the Senate Finance Committee, said that charities are still recovering from the market crash of 2008 and now isn’t the time to experiment with deduction caps for giving. “Tax reform options being discussed today are options that target charitable giving concocted by those who — hungry for more taxpayer dollars to finance reckless government spending — are now casting their sites on the already depleted resources of charities and churches,” he said. Hatch cited research indicating that the president’s proposal to cap the charitable deduction at 28 percent could lead to a drop in total charitable giving of $6 billion annually.

The Congressional Budget Office (CBO) examined 11 options for altering the income tax treatment of charitable giving, most of which included some form of adding a floor to the existing deduction; allowing all taxpayers to claim a deduction, with or without a floor; and replacing the deduction with a tax credit.

CBO analyzed two floors, one a fix dollar amount of $500 for individuals ($1,000 for couples filing jointly), and another as a percentage of income (2 percent of Adjusted Gross Income). Only contributions in excess of the floor would be deductible, or eligible for a tax credit. Adding a contribution floor to any of the approaches would reduce both the total federal tax subsidy and the total amount donated to charity, relative to the same option without a floor, according to Frank Sammartino, assistant director for tax analysis at CBO.

The 11 scenarios envisioned anywhere from a $2.7-billion bump in contributions to a $10-billion decline coupled with a tax subsidy ranging from a $7-billion gain to a $25-billion loss.

Most proposals that place limits on the charitable deduction would result in less charitable giving according CBO analyzes, Hatch said, or an increase in federal tax expenditures. Proposals that project an increase in donations yet reduce federal tax expenditures, he said, sound “too good to be true.”

“The changes being discussed are radical ones. This is not an area for experimentation by the federal government. It is certainly not the time to experiment with the charitable deduction by converting it to a tax credit,” Hatch said.

“Those at the bottom of the economic spectrum suffered most in the recession. They would bear the brunt of tax policy changes,” said Brian Gallagher, president and CEO of United Way Worldwide, based in Arlington, Va. Tax incentives often are a factor in how much donors give but not necessarily if they give, he said. He added that donors simply will withhold the difference they’re impacted by the tax rate. “Decoupling the tax rate from the deduction will be the beginning of the whittling away of the deduction,” Gallagher testified.

Eugene Steurle, the Richard B. Fischer chair and an Institute Fellow at the Urban Institute in Washington, D.C., said combining some of the options presented could be possible solutions. “Combining options creates new possibilities,” he said, such as extending a deduction to non-itemizers initially while enacting a floor on giving. “It could be designed to increase both revenue and charitable giving without adding to compliance costs” for the IRS.

Steurle also took aim at improved reporting on charitable contributions in the long run, including electronic filing by most charities, and limiting the deductibility for in-kind gifts because it can be ripe for abuse. “There’s a fairly extraordinary amount of deductions being taken,” he said, adding that charities sometimes receive a “very time amount” of the deductions taken thanks to intermediary organizations.

Of the proposals, an income-based floor on charitable deductions appears best to fit within current policy tenets, said Roger Colinvaux, associate professor at Columbus School of Law at The Catholic University of America. “A floor would improve the incentive aspect of the deduction by encouraging contributions at the margin. In other words, a floor would reduce the windfall that many taxpayers receive for charitable contributions they would have made with or without a tax benefit, and so could make the deduction more cost effective,” he said.

Colinvaux suggested linking the deduction to tax-exemption. “It’s hard to have this discussion when talking about deductibility and exemption at the same time reforming deduction is a heavy lift and a long-term project,” he said. If Congress wants to act quicker, it can raise the revenue without tax reform with one of the proposals on the table. An income-based floor on deductions would be the best fit within current policy, he said.

Elder Dallin Oaks of The Church of Jersey Christ of Latter-day Saints, focused his testimony on the good work that volunteers provide and what that mean for charities’ efforts.

The role of volunteers, whose efforts are not measured on financial reports, is very important, said Oaks, pointing to the response in rebuilding the Gulf Coast after Katrina and other hurricanes. “If you cut into the deduction, the activities of charitable organizations and the roles of volunteers…is going to be decreased,” he said. Whatever functions government presumes to provide in lieu of the charitable sector is going to call forth a great deal less from volunteers than what charitable organizations would call forth, Oaks said.

“The beauty of our system is that it’s simple,” said Gallagher, adding every proposal floated the past few years makes the system more complex. “It’s so efficient because volunteers follow the money,” he said, leveraging charitable contributions.

In a survey of donors, United Way found that almost a quarter of them said that any change to the tax rate would have a major impact on giving, Gallgher said. “The timing is bad, not just on financial terms, but at a time when local communities will have to find new solutions to difficult social problems,” he said. United Way is directly counseling governments in the United Kingdom, France and China about what they can put into their tax code to provide private initiative in communities.

How much charitable giving might be affected by a deduction cap is anyone’s guess, but some have estimated that giving could drop anywhere from $1.7 billion to $3.1 billion. (Americans last year gave almost $300 billion to charities).

Sen. Jon Thune (R-S.D.), a member of the committee, said he did not support reducing the deduction to raise revenues, outside of an overall tax reform effort.

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