Changing the Charitable Deduction
Could Discourage the Most-Generous Donors
IT IS NOW OBVIOUS to most Americans that the nation faces unprecedented economic challenges as the gap
continues to grow between the
amount federal and state governments spend and the amount
they collect in taxes.
With growing political consensus on the need to reduce
the deficit, it is no longer a question of “if” the country will overhaul how it approaches taxing
and spending; it is only a question of when and how we decide
to put our nation’s fiscal house
in order.
And that process is now raising a big question for every non-profit in America—whether donors will be allowed the same
tax benefits for charitable gifts
in the future as they are today.
Members of Congress and the
White House have floated several proposals for ways to change
how our federal tax system
treats charitable gifts, mortgage interest, and other itemized deductions.
The president’s latest bud-
get proposal would, for exam-
ple, raise money for the federal
Treasury by imposing new tax-
es on the amount the wealthy
give to charity. While no one
is sure what “wealthy” might
ultimately mean under this
plan, the president has previ-
ously suggested that he means
people who make $250,000 or
more per year. That definition
covers more people than you
might think—including the av-
erage police captain married
to a nursing supervisor in New
York City.
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the upper-income brackets could
only deduct charitable gifts at
the 28-percent tax rate.
If the 39.6-percent tax bracket is restored, as the president
has suggested, the out-of-pocket cost of making a gift would
rise even more. The only way to
keep the cash outlay for charitable gifts the same under these
circumstances is to give less.
The deductibility of charitable gifts regardless of one’s tax
rate—rich or poor—has been a
time-tested component of the
tax code that has survived innumerable challenges for nearly
a century. Some support the deduction as a way to encourage
charitable giving, while others
believe that amounts voluntarily given to charity should be
treated differently from income
that people spend, save, or otherwise use for their own benefit—and should not be taxed
like the income devoted to personal use.
Limits already exist on the
amount of charitable gifts a
taxpayer can deduct. For example, people can deduct no more
than 50 percent of their adjusted gross income for their charitable gifts (or 30 percent in the
case of appreciated securities
and some other noncash assets).
The theory behind these limits
is that no one should completely
opt out of taxes by giving all of
his or her income to charity. According to the Internal Revenue
Service, some 439,000 generous
Americans encountered these
limits on charitable deductions
in 2008.
Central to understanding this
debate is one simple truth: Regardless of tax rates, it always
costs money to make a charitable gift. That is why the tax
deduction for charitable gifts is
by no means the primary motivation for most donors when deciding to make donations. That
being said, limits on charitable
deductions can increase the cost
of gifts and can cause donors to
change the amount and timing
of their gifts.
What experienced fund raiser
has not heard a donor say, “My
accountant has advised me not
to give any more this year”?
Why? Because to give more
would mean paying taxes on
the additional money they give
to charity.
If the administration’s proposals are adopted, the impact
of the tax increase aimed at
charitable gifts would fall on
donors who are already paying the highest tax rates and
stand to face the largest tax
increases on the income they
otherwise spend for their own
benefit. Why should those who
voluntarily give of their wealth
to benefit others be singled out
for a tax increase as a reward
THE CHRONICLE OF PHILAN THROP Y MARK LI TZLER
“C’mon, Arnie. I’m a veteran fund raiser. Don’t make me beg.”
for their generosity in the same
way as those who deduct the interest on jumbo mortgages?
To be sure, no one really believes the administration rel-ishes that thought or considers
charitable giving to be equivalent to tobacco use or other undesirable behavior that most
believe the tax code should discourage. Nevertheless, raising
the price on charitable giving
for the “wealthy” will be costly
collateral damage in the bud-get- deficit wars.
There is a problem with proposals that seek to treat all
itemized deduction the same
way. The mortgage deduction,
for example, benefits just one
person—the borrower. But the
charitable deduction in no way
enriches the donor, and it benefits society as a whole. Too much
At no other time in
history could this
be more harmful
to the nation’s
nonprofits.
mortgage interest being freely
deductible arguably may have
helped create the housing bubble and contributed in part to
our nation’s precarious economic situation. Excessive charitable giving almost certainly did
not.
Unfortunately, alarming new
evidence now indicates the economic tumult of the past few
years impacted charitable giving more than many experts
previously thought.
According to final tallies by
the IRS, the amount Americans
gave to charity and deducted
from their tax returns declined
by nearly 11 percent in 2008
alone. And recently released IRS
estimates suggest an additional
decline of nearly 10 percent for
2009. That is a total of almost
20 percent in recession-related
declines. (See article on Page 8.)
America’s nonprofits have not
faced similar drops in giving
since the Great Depression.
The deeper one goes into the
IRS data, the starker the problem becomes with the proposal
to tax charitable gifts by those
deemed to be wealthy. For example, those with incomes of
$200,000 or more (who are responsible for nearly half of all
charitable deductions) reduced
their giving by 20 percent in
2008 alone.
That is in keeping with the
fact that incomes reported
by people at this income level dropped by 13 percent from
2007 to 2008, more than four
times the 3-percent drop reported by people with incomes below
that level.
Although statistics for giving by income for 2009 are not
yet available, the estimated 10-
percent overall reduction would
suggest that we may see a similar picture for that year. No figures are yet available for 2010.
If the proposed new tax on
giving resulted in another 20-
percent drop in giving by those
with incomes over $200,000,
that would mean an additional
loss of gifts from individuals totaling more than all that American corporations donated in any
recent year, and about one-third
of the total given to all human-service groups.
While giving by Americans is
indeed resilient, we have discovered the hard way that it is by
no means immune to the vicissitudes of economic fate.
The losses wealthy people suffered in the recession have already reduced the amount they
can afford to give to charity. Is
now the time to discover how
much greater those reductions
might be if a new and unprecedented tax is imposed on those
gifts? Can our nation’s educational, religious, health-care,
arts, and social-service organizations afford to find out? Will
Congress stand ready to replace
what may have been lost?
Robert F. Sharpe Jr. is pres-
ident of the Sharpe Group, a
fund-raising consulting compa-
ny with offices in Memphis and
Washington.
