News and analysis
October 18, 2011

Senate Hearing Produces Sharp Opinions About Future of Tax Breaks for Charitable Gifts

Chairman of the Senate Finance Committee, Max Baucus.

Lawmakers and witnesses at a Senate Finance Committee hearing disagreed today over whether the charitable deduction is sacrosanct­—or fair game for policymakers who are seeking to raise federal revenue or make the tax system more fair.

Sen. Orrin Hatch of Utah—the committee’s senior Republican, who led most of the hearing—took the absolutist view. “There has been a charitable deduction in the tax code for nearly a century, and the proposals on the table would undo it,” he said. “This is not the area for experimentation by the federal government.”

But Sen. Max Baucus, the Montana Democrat who chairs the committee, highlighted inequities of the current system: Most Americans now do not get any tax benefits for their donations because they don’t itemize their deductions and some charities get bigger subsidies than others because they attract more high-income donors, who get the biggest tax breaks.

“Let us encourage charitable giving in a way that is fair and efficient,” said Senator Baucus, who left the hearing after his opening statement because of another commitment.

Devastating to Charities?

The Senate committee played host to the hearing to spotlight issues involved in the debate over whether to limit the charitable deduction as part of a plan to reduce the nation’s budget deficit. President Obama has proposed limiting to 28 percent the amount of their donations that wealthy people can write off on their income taxes, down from 35 percent now. A deficit-reduction committee that the president created proposed replacing the deduction with a tax credit for donations beyond 2 percent of adjusted gross income.

Two nonprofit leaders told the committee that such proposals could be devastating to charities.

Brian Gallagher, president of United Way Worldwide, noted that a recent study estimated that President Obama’s proposal could cut charitable giving by $2.9-billion to $5.6-billion a year.

“That equates to eliminating all of the private donations each year to the Red Cross, Goodwill, the YMCA, Habitat for Humanity, the Boys and Girls Clubs, Catholic Charities, and the American Cancer Society combined,” he said.

Dallin H. Oaks, a former president of Brigham Young University who is an elder of the Mormon Church, called the charitable deduction “vital to the private sector that is unique to America” and critical to the financial health of charities, which in turn mobilize millions of volunteers to work on projects to help people in need.

Other Options

A different view came from C. Eugene Steuerle, a fellow at the Urban Institute, who urged Congress to consider a package of measures that would both encourage more giving and cut the cost to the government of the tax break.

For example, it could expand the deduction to people who don’t itemize but allow it to be used only for donations over a certain percentage of income. It could also allow people to deduct donations they make up to the April 15 deadline for filing tax returns; improve IRS efforts to stamp out fraud; limit the deductibility of noncash gifts like clothing; and change the way excise taxes are applied to foundation investment income to encourage more giving.

Roger Colinvaux, a former top aide to Congress’s Joint Committee on Taxation who is now an associate professor at the Catholic University of America, said Congress should consider examining the charitable deduction at the same time it looks at the way tax exemptions are granted to charities. He said it may not make sense for all tax-exempt charities, a very broad category, to be eligible for tax-deductible contributions.

“The focus on any such examination should be on whether existing rules are maximizing the public benefit at the lowest cost to taxpayers,” he said in written testimony.

However, Mr. Colinvaux said if policymakers are looking for a short-term fix, the idea that would least disrupt the current system would be to make it apply only to donations over a certain percentage of income. He said that would “reduce the windfall that many taxpayers receive for charitable contributions they would have made with or without a tax benefit, and so could make the deduction more cost effective.”

Sen. Charles E. Grassley, Republican of Iowa, said lawmakers should consider whether it makes sense for donors to all types of charitable groups to receive the same tax benefit for giving “even though the standards for charitable status are vague.”

The Finance Committee, for example, had asked the Treasury Department to study rules governing “supporting organizations,” groups that are set up to finance the work of specific charities—and, he said, it is “four years overdue.” Senators have expressed concern that such organizations are being set up to give donors large tax breaks without serving a substantial charitable purpose.