• September 3, 2014

Obama Renews Effort to Limit Charitable Deduction

President Obama's budget for the 2014 fiscal year, released on Wednesday, is likely to infuriate many college fund-raising offices and other charitable organizations with its renewed call to limit the value of deductions for charitable contributions.

Nonprofit advocates, who have helped defeat Mr. Obama's previous attempts to limit tax savings on deductions, including those for charitable gifts, to 28 percent for the wealthiest taxpayers, were already gearing up to oppose the proposal.

The president's effort to rein in charitable deductions is getting the broadest attention in the nonprofit world because it would affect such a vast array of charitable causes. He has failed to persuade Congress to limit the value of the charitable deduction in seven previous attempts, but he proposed trying again on Wednesday as part of a larger effort to make the wealthy pay more to help balance the federal budget.

"If you're serious about deficit reduction, then there's no excuse to keep these loopholes open," President Obama said at a news conference. "They don't serve an economic purpose. They don't grow our economy. They don't put people back to work. All they do is to allow folks who are already well-off and well-connected game the system."

When asked how Mr. Obama would overcome opposition to the proposal from lawmakers in both parties due to worries about the impact on charities, a White House spokesman said last week that the president was confident he could forge a compromise with a "common-sense caucus."

High-Income Taxpayers

Mr. Obama has failed since 2009 to enact a 28-percent limit on the value of itemized deductions for such expenses as mortgage interest, state and local taxes, and gifts to charities as a way to help tame the federal budget deficit.

A coalition of charities helped head off the president's most recent attempt when the White House and Congress reached a budget deal on January 2. In fact, that agreement actually increased the value of itemized deductions by raising the top marginal income-tax rate to 39.6 percent from 35 percent. Because the charitable deduction is tied to a person's tax rate, donors in the highest bracket are now able to get a tax savings of 39.6 cents for every dollar donated to charity.

That means a $1,000 contribution would cost a taxpayer $604.

The 28-percent proposal would limit the value of the deduction to $280 on that same gift, increasing the cost of the donation to $720, or by 19.2 percent.

The White House estimates that the new limit would generate $321-billion in additional revenue through 2021, according to the Tax Policy Center.

Obama-administration officials have said that the change would affect only high-income taxpayers—single people with incomes in excess of $200,000 and married couples with incomes above $250,000. Taxpayers with incomes below those levels who do not itemize deductions would not be affected—"the vast majority of donors," Jacob Lew, the new treasury secretary, said.

But nonprofit advocates say the proposal could reduce donations by as much as $9-billion annually.

The Senate's budget proposal for 2014, approved last month, called for considering several methods for limiting deductions. It mentioned such ideas as replacing the deduction with a 12-percent tax credit that would be available only for amounts beyond 2 percent of a taxpayer's adjusted gross income; a dollar cap; and a limit of 2 percent of adjusted gross income on the tax benefits derived from deductions (although the chief proponent of that idea wants to exclude charities from such a limit).

The House budget does not mention itemized deductions.

Mobilizing Anew

The Charitable Giving Coalition, which has led previous fights against limits, has already mobilized to beat back the latest effort as well.

"The charitable deduction is different than other itemized deductions in that it encourages individuals to give away a portion of their income to those in need," states a March 14 letter that the coalition sent to Sen. Patty Murray, the Washington Democrat who leads the Senate Budget Committee. "It is not a tax cut for the wealthy."

The coalition states that a 28-percent cap would result in the loss of $1.7-billion to $5.6-billion in donations each year.

A dollar cap would be "even more devastating," the coalition says, because taxpayers would hit the maximum deduction on mortgage interest and local taxes before calculating charitable gifts.

Donations would drop $3-billion if a 2-percent adjusted-gross-income floor were imposed, the letter states. And $9.17-billion could be lost if a 12-percent tax credit replaced the deduction.

Doug Donovan is a senior reporter and Suzanne Perry is a senior editor at The Chronicle of Philanthropy.

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