Protect the Charitable Giving Incentive

Federal tax law currently encourages individuals to give to charitable organizations whose missions they support by providing an itemized deduction. Policymakers in Washington are focusing on how to reduce the federal budget deficit through spending cuts, entitlement reforms, and changes to the tax code. The President, Senators, Representatives, bi-partisan commissions, and think tanks have all put forward plans to address these issues, and all propose changing the charitable giving incentive in one way or another. No one knows the true impact that any of these proposals will have on the ability of nonprofits to raise the resources needed to provide the programs and services that fulfill their missions. It is imperative that Congress make no changes to the charitable giving incentive that threaten the ability of nonprofit organizations to serve those most in need and to continue to strengthen our communities.

Why it Matters to Nonprofits

Nonprofit organizations throughout the United States are dedicated to the public good; their work improves lives, strengthens communities and the economy, and lightens the burdens of government, taxpayers, and society as a whole.  Maintaining the value of the charitable deduction is essential to the ongoing work of nonprofit organizations in delivering essential services, enhancing quality of life, and uplifting the spirit of faith, innovation, and inspiration in local communities across America.

What Nonprofits Can Do

Nonprofits can continue to communicate the value of the charitable giving incentive to members of Congress by taking these actions:

• Sign onto the nonprofit community letter calling on legislative leaders to preserve the charitable deduction.

Read the letter.

Sign on so your voice is heard.

• Contact your Senators and Representatives directly and urge them to oppose any future changes to the charitable giving incentive that threaten the ability of nonprofit organizations to serve those most in need and to continue to strengthen our communities.

Status

The co-chairs of the Joint Select Committee on Deficit Reduction announced in a joint statement on November 21 that the Supercommittee of Congress was unable to reach agreement on a package of spending cuts, tax increases, and entitlement reforms that generate $1.2 trillion in deficit reduction over the next ten years, as mandated by the Budget Control Act passed last August. This means that the immediate threat to the charitable giving incentive contained in two of Congress’s recent proposals will fade with the Supercommittee – Congress will not vote by December 23 on an un-amendable package of tax reforms that radically changes the way the work of nonprofits is funded.

However, considerations of changes to the charitable deduction and other itemized deductions are likely to reoccur in future deficit negotiations. As demonstrated by the Supercommittee’s negotiations, Congress remains very interested in comprehensive tax reform (lowering rates; abolishing loopholes, deductions, and credits; broadening the base).

Senate Hears Testimony on Changing Charitable Incentives

The Senate Finance Committee heard extensive testimony on Tuesday, October 18 on whether and how to change the current charitable giving incentive to make it “fairer” and more “effective.” Proposals ranged from expanding incentives to all taxpayers, on the one hand, to imposing floors on giving before tax deductions could be claimed or switching to a tax credit that would raise significant federal revenues but curb charitable giving by several billion dollars per year.

Member Statements

Max Baucus (D-MT)

Orrin G. Hatch (R-UT)

Witness Testimony

Mr. Frank Sammartino, Assistant Director For Tax Analysis, Congressional Budget Office, Washington, DC

Elder Dallin H. Oaks, The Quorum of the Twelve Apostles, The Church of Jesus Christ of Latter-day Saints, Salt Lake City, UT

Dr. Eugene Steuerle, Richard B. Fisher Chair and Institute Fellow, The Urban Institute, Washington, DC

Mr. Brian A. Gallagher, President and CEO, United Way Worldwide, Alexandria, VA

Mr. Roger Colinvaux, Associate Professor, The Catholic University of America, Columbus School of Law, Washington, DC

Proposals to Alter the Charitable Deduction

• Obama 28% Limit: President Obama has proposed limiting the value of charitable and itemized deductions for upper-income taxpayers, capping the deduction at 28 percent, regardless of whether the individuals are in the 33 percent or 35 percent tax brackets. This proposal has been included in the President’s American Jobs Act, his deficit reduction plan submitted to the supercommittee, and in his three annual budget proposals.
• 12% Tax Credit: The National Commission on Fiscal Responsibility and Reform (Bowles-Simpson Commission) empaneled by President Obama recommended significant changes to the federal tax code, including converting the current charitable itemized deduction into a 12-percent, non-refundable tax credit available to all taxpayers, but only for donations above two percent of Adjusted Gross Income (AGI).
• 15% Refundable Credit: the Bipartisan Policy Center's Debt Reduction Task Force issued its own set of recommendations for deficit reduction that included cutting individual income tax rates and reducing the number of tax brackets, and eliminating the charitable deduction and replacing it with a 15 percent refundable tax credit payable to nonprofits.
• The Congressional Budget Office issued a report in May 2011 projecting the potential impact of 11 proposals to alter the charitable giving incentive in the federal tax code. The report found that both charitable giving and federal tax receipts would increase if Congress either (a) applied the tax deduction to all taxpayers (itemizers and non-itemizers alike) but imposed a minimum floor on contributions of $500 for individuals and $1000 for couples, or (b) converted the deduction to a 25 percent tax credit for everyone who gave more than the $500/$1000 floor.
• Martin Feldstein presented a proposal to cap the value of all itemized deductions, including charitable giving, mortgage interest, and state and local sales taxes, at two percent of adjusted gross income (AGI). Although some of Feldstein’s writings have suggested that Congress may want to exempt charitable giving from the cap, no congressional proposal containing this version of the Feldstein plan has yet been offered.

The Economic Impact on Nonprofits

Estimates on the economic impact that the Presient's original proposal and other recommendations on changing the giving incentive vary widely.

• CBO's Proposals: The CBO's 11 policy proposals for how to restructure the charitable giving incentive and the economic impact that each would have are listed in the chart below:

• President's Proposal: Once a part of the jobs bills, The President’s proposal to decrease the cap on the charitable giving incentive from 35 percent to 28 percent has met with diverse predictions about the effect it will have on the contributions nonprofits receive, ranging from a minor impact (a decline of 1.9 percent) to a moderate impact (a decline of 4.6 percent) to a large impact (a decline of $7 billion.)

Additional Resources

• Nonprofit Community Sign-On Letter
• Budget Control Act creating the Joint Select Committee on Deficit Reduction
• American Jobs Act
• Feldstein Proposal
• Recommendations of the National Commission on Fiscal Responsibility and Reform (Bowles-Simpson Commission)
• Recommendations of the Bipartisan Policy Center's Debt Reduction Task Force
• Congressional Budget Office Analysis of Reforms to the Charitable Deduction