Nonprofit leaders might be girding themselves for the possibility of having to fend off the return of a proposal that would cap tax deductions for higher-income households, potentially hurting charitable giving.
The Biden administration is expected to release its federal budget proposal in May. As a candidate, now President Joe Biden proposed a 28% cap on the value of itemized deductions — which includes those for charitable contributions — for those earning more than $400,000. Former President Barack Obama proposed similar caps several times during his tenure on households earning more than $250,000.
Independent Sector President & CEO Daniel Cardinali penned a nearly 1,200-word letter to U.S. Secretary of the Treasury Janet Yellen on March 15, requesting a meeting with Treasury officials to “discuss these issues and concerns more deeply.”
Campaign tax proposals are often difficult to evaluate and often don’t have the level of specificity of federal budgets or policies, according to Ben Kershaw, director, public policy and government relations at Independent Sector said. “Treasury folks are now in the process of taking a lot of campaign poetry and turning it into governing prose. These are the times when those details get fleshed,” he said.
Kershaw and Cardinali, along with several IS members, met last week via videoconference for about an hour with senior staff from the Department of Treasury.
President Barack Obama at least four times proposed lowering the deductibility of charitable contributions for those earning more than $250,000 from 35% to 28%. Instead, the cap eventually was replaced with a 5.6% surtax on those with annual income of more than $1 million. That was expected to raise $445 over 10 years.
As a candidate, Biden proposed capping the tax benefit of itemized deductions at 28% for those earning more than $400,000. Those earning more than $400,000 with tax rates higher than 28% would face limited itemized deductions. The Tax Foundation estimated the proposal would generate about $283 billion in revenue.
“Our perspective is not that the Biden administration shouldn’t try to raise revenue from people who can afford it to pay for the nation’s priorities,” Kershaw said. “Our perspective is just that that ought not to come at the expense of increasing the cost of giving for some Americans who account for a huge share of charitable resources,” he said.
When a 28% cap on itemized deductions was first offered in 2009 by the Obama Administration as part of its Fiscal Year 2010 budget proposal, Cardinali said the charitable sector was caught by surprise, but mobilized opposition.
“Limiting the charitable deduction at 28% for high-income taxpayers – which in 2012 was estimated to reduce annual charitable giving by as much as $7 billion – will not achieve more equitable outcomes in our communities,” Cardinali wrote. Reducing charitable giving by $7 billion, Cardinali pointed out, would exceed the annual contributions received by Feeding America, Goodwill Industries, Habitat for Humanity, Catholic Charities, American Heart Association, March of Dimes, and Feed the Children combined.
A 2013 study by the American Enterprise Institute estimated that giving would drop more than 4%, or almost $10 billion, if the charitable deduction were capped at 28% for households earning more than $250,000.
The Tax Cuts and Jobs Act, which went into effect in 2018, essentially doubled the standard deduction, leading to a dramatic decrease in taxpayers who itemize — from about 1 in 3 to about 1 in 10. That has forced nonprofits to focus even more on fundraising from a smaller pool of households that would be even more likely to be disincentivized by this limit, Cardinali contended.
Kershaw said the Obama administration wasn’t entirely expecting the level of alarm from the sector that they faced. The hope is for something that looks more like the “Buffet Rule,” which came out later in the Obama-Biden administration and candidate Hillary Clinton’s tax proposal. The “Buffet Rule” would levy an additional tax on those with adjusted gross incomes (AGI) of more than $2 million — to ensure that they pay at least 30% in federal taxes — while providing a credit against that tax for charitable contributions. “We hope policy makers have learned their lesson a little bit on this particular item,” Kershaw said.