Healthcare Reform At What Cost?

October 1, 2009       Craig Causer      

Since President Obama announced his plans for sweeping reform of the healthcare system, talk of a “public option” and alleged “death panels” has raised a ruckus at town hall meetings across the country.

For many nonprofits, the term “reduced charitable deduction rate” is at the top of the list of the ire-breeding aspects of current proposals as the president attempts to find a way to finance healthcare reform. In what might be considered unusual, not all nonprofit executives believe that the tax on people making more than $250,000, the president’s proposal, and the deduction reduction, is a bad thing.

When the White House released its initial 2010 budget proposal, it sought to raise $320 billion over 10 years to fund healthcare by limiting itemized deductions for taxpayers earning more than $250,000. Starting in 2011, it would cap the deduction for gifts to charity at 28 percent of adjusted gross income. A modified proposal was also suggested. It would limit itemized deductions to 33 percent or 35 percent for taxpayers whose income tax brackets would increase to 36 percent or 39.6 percent in 2011.

Both proposals have met stiff resistance from most nonprofits that fear a cutback in the charitable deduction rate will significantly hamper overall fundraising.

“We are vehemently opposed to this proposal,” said Bill McGinly, president and chief executive officer at the Falls Church, Va.-based Association for Healthcare Philanthropy (AHP). “It would really be disastrous across the board — not just for healthcare philanthropy. This was an early proposal from Obama, and the budget, in dropping that deductibility, very clearly would reduce contributions to all sorts of charities. At one point I recall their numbers said this was going to raise over $300 million for the government to devote to healthcare reform. Well, every dollar that was going to the government was coming out of philanthropy. Given the way things are in just normal economic times, that’s a tremendous loss for the philanthropic sector.”

One of the frustrating things for AHP members is that the original proposal to reduce the deduction rate simply will not die, despite opposition from many nonprofits, as well as resistance in Congress. “It often feels like the folks on Obama’s side in the House and Senate are not listening in some respects — it’s all about searching for the money,” McGinly added.

Like AHP, The Direct Marketing Association’s Nonprofit Federation (DMANF) has been opposed to any reduction in the charitable deduction rate from the first suggestion of it. The organization has been meeting with members of Congress to inform them that the group will continue to oppose any disincentive to philanthropic giving. In July, the DMANF gathered a coalition of charities to lend their voices to a letter to Rep. Charles Rangel (D-N.Y.), chair of the House Ways and Means Committee, designed to urge him to reject both the president’s proposal and the modified proposal to limit the value of itemized deductions.

“Éthe Giving USA report had charitable giving down by $6.4 billion last year,” noted Christopher Quinn, executive director of the DMANF. “Even though giving is down, charities continue to see requests for their services rise. Although healthcare reform is needed, paying for it at the expense of nonprofits and charities is not what we should be doing. Any further reduction in giving may in fact force charities to reduce services, lay off staff or at worst close their doors.”

Quinn also cited a 2008 Bank of America study that showed that 65-to-70 percent of all individual gifts come from that high-income earners tax bracket. The proposals might not cut giving altogether, but it would change both the amount and timing of gifts, he said.

With the death of longtime healthcare champion Sen. Ted Kennedy (D-Mass.), the 60-seat filibuster-proof majority in the Senate has gone bust, fueling more uncertainty as to how reform might impinge on nonprofits. In terms of the charitable deduction rate, the former Massachusetts senator’s death should not have an impact on the discussion since the deduction issue “is not a question of healthcare reform, but rather a question of it being an appropriate way to finance that reform,” according to Quinn.

Freeze tag

The president’s original proposal has seen a lot of opposition from the charities that receive funds from donors in the top tax brackets and it did not receive a huge amount of traction because of this fact, explained Diana Aviv, president and chief executive officer of Independent Sector (IS) in Washington, D.C.

On the other side of the issue, there are a lot of nonprofit officials who believe that if a new healthcare system isn’t in place now it will bad for society, and finding ways to fund it is part of the mix. The mix of which Aviv spoke is the talk about freezing current deduction levels rather than the proposal that the president initially put forth.

“On the Senate side, there’s an adjustment,” Aviv said. “The latest proposal, if it goes anywhere, would freeze the deduction at its current level that the taxpayers in the top two brackets could claim. So, the top two brackets would be 35 percent and 33 percent. If the president plans to increase taxes, or the House decides to increase taxes, the Senate would freeze current charitable deduction rates at current levels. We feel that healthcare is extremely important and we want to work with the White House and Congress to find a way to pay for it that doesn’t limit deductions for charitable giving at this moment in time. It looks to us that the current proposal in the Senate is the useful way to go.”

AHP’s McGinly believes that the proposal in the Senate is not acceptable. “There’s three different bills floating on the Senate side but everything we’ve seen so far has been very watered down,” he said. “Freezing the deduction rate at current levels isn’t any more palatable. Donors don’t give to you because of the tax deduction but they will give more because of it. That’s evident from research from the Center on Philanthropy, the Urban Institute, and others. It’s clear that the dollars that would go to the government for this lost or frozen deduction are coming out of the pockets of the not-for-profits.”

Not all nonprofits believe that the tax on people making more than $250,000 — the president’s proposal — is a bad thing. Aviv revealed that there is a spilt in the members of IS’s Public Policy Committee and on its board regarding healthcare issues. Some on its board members believe reducing the charitable deduction rate is the wrong way to go and it is the wrong time to do it, she said. “Others believe that the tax breaks that the wealthy have received over the last eight years are such that it has widened the gap between rich and poor. They feel that the responsible thing to do is to go to the people who have the money to draw funds from them and this is one vehicle to do that. So, I don’t think it’s accurate to say that everybody in the nonprofit community thinks this is a bad idea.”

Healthcare reform has been a top legislative priority for Easter Seals for some time. The nonprofit continues to be active in promoting reform that will allow more people to have access to healthcare, including the approximately 50 million people who are uninsured and those with disabilities who have insurance that doesn’t quite meet their needs, according to Randy Rutta, executive vice president, Office of Public Affairs, for the Chicago-based nonprofit. When the Obama administration included in its proposal the idea of reducing the rate for itemized deductions for high-income taxpayers, Easter Seals became concerned.

The organization understands that many of the reforms needed in healthcare will have to be financed and its managers think that it is appropriate for the government to look at all of the options that are out there to find more effective and efficient ways to provide care, Rutta said. “We view any proposal that does not endorse or support an increase in philanthropy as something to be concerned about,” Rutta said. “But reform could also involve an entirely new set of benefits to support people in their wellness and with their independence. So we’re trying to be responsible and propose strategies that are very sensitive to resource demands.”

She continued: “We really haven’t gotten to the point where we’ve strongly endorsed or rejected a proposal. We’ve kept it at a more philosophical level. We know that the government is heavily invested in the role that nonprofits play and we really want to see incentives and make it easier for people to be philanthropic.”

Other nonprofits, including the Washington, D.C.-based National Health Council (NHC), have opted to refrain from commenting on the potential of a reduction in the charitable deduction. While the organization’s Web site contains a wealth of information on healthcare reform with a goal of getting reform legislation passed this year, “The NHC does not have a position on the charitable deduction as it relates to healthcare reform,” according to Nancy Hughes, director of communications and marketing at the organization.

The great debate

While there’s debate that some high-end donors would give less if the deduction were cut, Aviv doesn’t think that behavior is true for everybody. In the end, it all comes down to the essence of why people give.

According to both McGinly and Aviv, the charitable deduction rate is one of a number of economic factors that most concern both donors and nonprofits. Neither executive believes that there is an underlying sentiment from donors that should a government option take hold, that giving would decrease because the public would expect the government to pick up the tab on areas previously handled by healthcare-related nonprofits.

The public knows the difference between charitable efforts and government programs, McGinly said. For instance, the SNAP food stamp program isn’t putting nonprofits like City Harvest, Food For The Poor, and Feeding America out of business.

“Our experience and research tells us that people give no matter what, but the amount they give is somewhat affected by the deduction,” Aviv explained. “Organizations are right that it could affect giving but what we think is affecting giving more than anything is this economy. If the president and Congress can get the economy stabilized, that will more than likely have a bigger impact on giving than anything else.”

McGinly agreed that bolstering the economy is key but he does not envision a panacea for the ills of the healthcare system anytime soon. “We’re going to walk away from this without any meaningful healthcare reform,” he predicted. “It’s piecemeal. It’s not really addressing the crucial issues, which are very complex. I think they may be trying to do too much, too quickly and the timing might also be wrong for this. The focus should be on the economy and how to turn that around. If part of the funding is based on this deductibility being reduced, we’re going to see ever more increasing pressure on not-for-profits and a continued growth in demand for services.” NPT

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