Extending the charitable deduction to all taxpayers – not just itemizers – and allowing donations until April 15 to be counted in the previous tax year were among the proposals by nonprofits to incentive charitable giving even more.
Nonprofit leaders raced to Capitol Hill in Washington, D.C., today to provide input on potential tax reform and remind legislators to keep the charitable deduction intact as the House Ways and Means Committee began discussion on comprehensive tax reform.
More than 40 representatives of nonprofits – nine panels of witnesses — were scheduled to testify. The fourth panel of witnesses had begun testimony nearly four hours after the hearing got under way at 9:45 a.m.
House Ways and Means Committee Chairman Dave Camp (R-Mich.) said the committee granted “all timely requests to testify in person” and over the last several months has heard different ways that the tax code might be changed to affect the nonprofit sector. Some of those include limiting the tax rate against which contributions may be deducted, a dollar cap on itemized deductions, a floor below which contributions may not be deducted, and the replacement of the deduction with a tax credit available, regardless of whether a taxpayer itemizes.
United Way Worldwide President & CEO Brian Gallagher urged the committee to preserve the charitable deduction for all donors, and “in light of the apparently inevitable cuts to government programs and the proven value of the nonprofit sector, encourage the committee to consider ways to further incentivize private charitable giving.”
Conservative estimates on the impact of a 28-percent cap on the charitable deduction indicate that donations to United Ways would be reduced by more than $100 million annually, said Gallagher. “That would be like eliminating two of the three biggest United Ways testifying today (Philadelphia, Washington, D.C. and Cleveland), or eliminating all of the remaining 10 United Ways scheduled to testify,” he said. A dozen local United Way CEOs were scheduled to testify throughout the day.
“Don’t be fooled into thinking that limiting the deduction will only impact wealthy taxpayers,” Gallagher said. “If the deduction is reduced, expect donors to withhold the difference necessary to cover the tax from their donations,” he said. Almost a quarter of high-net worth individuals in a recent survey indicated that receiving tax benefits for charitable contributions was a “major” motivation for giving.
A variety of proposals to limit the deduction have been circulated the last few years, each has two common elements: limiting the value of the deduction for some group of donors, and reducing giving to charity “to the detriment of individuals and families who rely on our help.”
“I don’t think we can overstate the simplicity and compelling nature of tying the charitable deduction to an individual’s tax rate is the envy of the world. Its simple, compelling and it works,” said Gallagher.
Tax incentives matter, not whether donors give, but how much they give, according to Eugene R. Tempel, Ph.D., the founding dean of the Indiana University School of Philanthropy. The two biggest drivers of increased giving year to year – going back to the 1960s and through various tax schemes – are the rise of household income and the rise of the S&P 500.
The cost of giving matters to individuals, said Tempel, pointing to 1987 when donors moved their giving from 1986 to 1987 to take advantage of a higher giving rate. Donors accelerated giving at the end of last year in anticipation of gifts costing more, said Gallagher, while others reduced annual giving in anticipation of higher costs.
“Anything you can do to shift the cost of a donation from the donor to the beneficiary is helpful,” said Tempel.
During the second panel, Independent Sector CEO Diana Aviv said the most active proposal to reduce the value of the charitable deduction has been the president’s effort to limit itemized deductions for taxpayers earning more than $200,000 annually at 28 percent. “When top marginal rates were 35 percent, experts predicted this proposal would cause charitable giving to decline by anywhere between $1.7 billion and $7 billion per year, and with top marginal rates now at 39.6 percent, capping the deduction at 28 percent would likely cause an even more drastic decline in giving,” she said.
Aviv suggested permanent charitable tax extenders, including the IRA charitable rollover, enhanced deduction for contributions of food inventory, and special rules for the contributions of capital gain real property for conservation purposes.
Eugene Steuerle, the Richard B. Fisher chair and Institute Fellow at the Urban Institute, recommended reforming subsidies that tend to be ineffective and invited abuse, such as the deduction for household goods and clothing.