Ideas to Limit Charitable Deductions in Tax Code Overhaul Worrisome for Charities

by Aaron Lorenzo, The Bureau of National Affairs

Reproduced with permission from Daily Tax Report, 32 DTR G-2 (Feb. 15, 2013). Copyright 2013 by The Bureau of National Affairs, Inc. (800-372-1033) www.bna.com


February 15, 2013

Legislators should tread carefully in considering changes to tax deductions for charities, dozens of their representatives said during a House Ways and Means Committee hearing Feb. 14.
Alterations would lead to less giving and hurt recipients, they said. Several were particularly critical of a proposal from President Obama to cap all deductions for top earners at 28 percent to raise revenue through the tax code, which they said would do more harm than good.

Though the White House and Congress are exploring this and other tax code changes in the context of overhauling the tax code, such reform should sidestep charitable deductions, most of the hearing’s 42 witnesses told committee members during seven panels of testimony.

“Efforts to cap, limit, or even eliminate the charitable deduction would be a dangerous social experiment,” warned Kevin Murphy, chairman of the Council on Foundations, a group that represents about 1,700 grant-making foundations.

Others in the charitable community struck a similar tone during the hearing, which Ways and Means Chairman Dave Camp (R-Mich.) said he convened to get input before the committee begins to consider proposals. More than 1 million charities exist in the United States.

Proposals Under Consideration

Camp, who said their perspective was needed for the process, listed a number of potential changes that could be considered, including limiting the tax rate against which contributions may be deducted, akin to Obama’s idea; setting a dollar cap on total itemized deductions, an idea on which Republican presidential candidate Mitt Romney campaigned; establishing a floor below which contributions may not be deducted; and replacing the deduction with a tax credit available regardless of whether a taxpayer itemizes.

Many witnesses were warm to the latter two of those ideas, making a credit available to those who file non-itemized tax returns in tandem with setting a floor under deductions so only amounts higher than the floor are deductible. Some said that would help expand giving incentives while also minimizing administrative costs for compliance.

Better Enforcement Needed

“Right now, taxpayers can give up to $500 in contributions and you don’t have to separately report that as you do with higher-valued property contributions,” said Roger Colinvaux, a law school professor at Catholic University.

“We really don’t know whether the property being given under $500 is anything close to the value that is claimed by taxpayers, or whether the donor organizations are getting any benefits from those contributions.”

Numerous witnesses urged other avenues for better compliance with rules on taxable donations in lieu of limiting charitable deductions to reduce tax expenditures as part of broader tax reform goals, considering they are among the 10 largest expenditures in the tax code that added up to an estimated $170 billion in 2010.

For example, the Internal Revenue Service should have better tools to monitor charitable deductions, said C. Eugene Steuerle, a fellow at the Urban Institute. He also called for reducing opportunities for taxpayers to overvalue gifts such as clothing and household items, and removing their ability to declare deductions for giving that never took place.
“There would be strong support for any effort to do that, I think, from the nonprofit sector,” Murphy said.

Steuerle, who also backed the floor on deductions, also suggested that donors should be able to give until April 15 or the date they file their taxes to count for the prior year, as is allowed for individual retirement accounts.

If the tax system is to encourage giving, then the best time to advertise is when people are filling out their tax returns or their tax preparers are looking for additional ways to save on taxes, Steuerle said.
Lawmakers should take care with changes in the near term, numerous witnesses warned, as charities are still grappling with reduced donations in the wake of the 2007-2009 recession and slow economic growth ever since. Witnesses were also cool to amending tax incentives to favor domestic donations over foreign giving.

Uncertainty Slows Donations

Federal tax policies have a significant effect on charitable giving, said Eugene Tempel, dean of the Indiana University School of Philanthropy, affecting how much and when people give, as well as to what causes.

For example, uncertainty slows the rate of giving, he said. To help that, Congress should make permanent a provision that allows direct tax-free distributions from IRAs to charity, said Conrad Teitell, a lawyer at Cummings& Lockwood LLC who testified on behalf of the American Council of Gift Annuities.

Among additional policy impact, Tempel said research shows that higher marginal tax rates typically lead to more charitable giving, but lower rates do not also increase giving, he said in response to a question from Camp. Capping or eliminating the charitable deduction, without other tax policy changes, generally negatively affects charitable giving, Tempel added.
Other research shows the wealthier donate more, Tempel said. He said IRS data show that the top 10 percent of income earners–those with incomes of $100,000 or more–gave almost two-thirds of all itemized contributions in 2009, while the top 1 percent of earners gave 37 percent.

But tax deductions for donations are not a loophole or a benefit for the rich, said Murphy, who in addition to others at the hearing warned against limiting donations from the wealthy. Charitable giving, even with a federal incentive, does not leave donors in a better financial position, Murphy said.

David Wills, president of the National Christian Foundation, added that charitable deduction is the only tax benefit that encourages individuals to give away their income without personal financial gain.

According to Tempel, research shows that adopting Obama’s proposal to cap donations from the wealthy would lead to a 1.3 percent drop in total itemized household giving, and that giving by the households specifically affected by the changes would fall by 2.4 percent.