As President Obama seeks to reduce the value of the charitable deduction for wealthy Americans, fund raisers and other nonprofit experts are divided over whether his idea would cause any substantial change in charitable giving.
The proposal, which hasn’t even been formally sent to Congress, has already caused some concern among wealthy donors, and could well prompt fund raisers to urge wealthy people to give now so they don’t lose the value of their tax breaks by giving after Mr. Obama’s plan takes effect.
Mr. Obama proposed last week to limit the charitable deduction to help pay for reshaping the nation’s health-care system.
His proposal would affect families that have more than $250,000 in income, beginning in 2011. Instead of saving 33 or 35 cents for each dollar donated, as they do now, those taxpayers would save 28 cents under the Obama plan. Mr. Obama’s overall budget proposal would also increase the taxes owed by the wealthiest taxpayers from 33 or 35 percent up to 36 and 39.6 percent of their income in 2011.
In effect, the proposed budget would increase the cost of giving to charity for wealthy donors by reducing the amount of money they can deduct from their taxes.
Independent Sector, the Partnership for Philanthropic Planning (formerly known as the National Committee on Planned Giving), and other nonprofit groups say that limiting the charitable deduction would put a damper on contributions, especially given the bad economy. Even though administration officials have sought to reassure charities that the economy will be better by 2011 when the provision would take effect, some charity leaders think financial conditions could still be rocky.
“My best guess is that this wouldn’t have a huge effect, but because of the economy it is going to have a worse effect,” said Eileen R. Heisman, president of the National Philanthropic Trust, in Philadelphia.
“It certainly is not going to make things better,” she said. “The question is how much worse it will be on top of worse. With the economy this bad, it does worry me that a new policy would be in place, giving wealthy people a disincentive to give.”
That is already the case for some wealthier donors, even though the plan is far from becoming law. Mike Bacile, owner of a Dallas company that provides equipment to restaurants and hotels, said he and his wife have recently set up meetings with officials at two charities to inform them that they will no longer be able to support their causes. Mr. Bacile said he and his wife typically give more than $10,000 to nonprofit groups annually—but they are now scaling back their contributions to about $5,000 annually.
“The upcoming tax hit has forced us to decide what must go,” Mr. Bacile said. “We will still be giving about $5,000 a year to charities that are very important to us for sentimental reasons, But the remaining $5,000 to $6,000 will be going to Obama’s plan. I am not a fan of government deciding what charities deserve my money.”
Plan Won’t ‘Kill Giving’
But some experts believe concerns about the economic impact of lowering the charitable deduction are exaggerated, and the actual effects of the provision on giving by the wealthy would be relatively modest.
“Every time people want to fool around with the tax code, [charities] say it will be the end of philanthropy,” said Bruce Flessner, a Minneapolis fund-raising consultant. “I don’t think it will kill giving.”
Using 2006 tax data, the most recent available, Indiana University’s Center on Philanthropy has estimated that giving by high-income households would have been 4.8 percent less if President Obama’s proposed limits on charitable deductions, and increases in taxes owed by the wealthiest Americans were in effect then.
Given this analysis, “we feel this budget proposal would not have much effect on whether people give but rather how much they give at the margins,” said Patrick Rooney, the center’s director of research.
However, the center said that changes in personal income and wealth, including the condition of the stock market, affect giving more than tax proposals. It noted that every time the stock market declines by 100 points, giving declines by $1.85-billion. Charitable donations rise by that same amount when the stock market increases.
Economy Makes a Difference
Some donors, in fact, say their giving will be affected more by the economy than by any change in the charitable deduction. Barbara Clarke of Winchester, Mass., said she and her husband are not at all concerned about Mr. Obama’s proposal. But she added that they have changed the the manner in which they give because of the recent decline in the stock market.
“The crash in the value of my portfolio takes a huge asset off the table and out of the equation,” Ms. Clarke said. “This actually made me realize that the way I was managing my philanthropy was totally different from the way I managed the rest of my spending. I would never consider relying on stock for any purchases that I need to make in the next five to seven years, so why was I doing it for philanthropy? That was a big eye opener.”
The White House argues that the new economic-stimulus package will help increase giving by boosting the economy and raising incomes. (See an article explaining the White House’s view.)
But others say the proposed limit on the charitable deduction would cause a big drop in giving. “Many charity officials do not understand how tax laws impact giving by the very wealthy,” said Emil Kallina, a Baltimore lawyer who advises affluent donors, including several billionaires, on their charitable plans. “For the vast majority of my clients, every tax dollar they save is an additional dollar for charity. Under the president’s budget proposal, that could amount to hundreds of thousands of dollars on a multimillion-dollar gift.”
Mr. Kallina said that, while President Obama’s budget faces an uphill battle in Congress, he is worried that the provision lowering the charitable deduction could pass, given the president’s popularity and his party’s majority on Capitol Hill. “It is the honeymoon, and Democrats control the House, the Senate, and the presidency,” he said. “The Republicans are not going to fall on their sword for charity.”
Charities should organize and speak out more about their opposition to limiting the charitable deduction, Mr. Kallina said. “Charities are not united,” he said. “There has been a lack of voices unifying the charitable world.”
Future Tax Breaks
Some fund raisers are less worried about the precise impact of Mr. Obama’s plan and more concerned about the precedent that could be set by reducing the value of the charitable deduction to wealthy donors
“You start worrying about where the slippery slope will end,” said Mr. Flessner “You have a philosophical issue about whether the government should play a bigger role and the private sector should be in a smaller role. There is a question of whether this is a direction in which we want to move.”
The Obama White House says limiting the charitable deduction would make the tax code more fair
Currently, in exchange for gifts, donors are allowed to reduce their taxes by the same percentage as their tax bracket; therefore, wealthier donors who pay a larger percentage of their income in taxes get a bigger write off.
That argument, however, has not gained much traction with experts like Mr. Kallina, the adviser to wealthy donors. Under the Obama budget, he says, “it is absolutely clear that charity is paying for the cost of health care, is that a good policy decision?” Health-care reform should not be done at the expense of giving, he said.
“Bluntly, this proposal allows the government to choose the charitable recipient rather than the donor,” Mr. Kallina said. “The government is cutting back on our ability to give to charity, because they want to dictate where the charitable dollars go.”
Robert F. Sharpe, a Memphis planned-giving consultant, said there is an argument to be made against cutting the charitable deduction because it flies in the face of a longstanding principle that people should not be taxed on money they give voluntarily for charitable purposes.
The budget proposal, if passed, would essentially be a tariff on giving by the most-generous donors, Mr. Sharpe said. “If we need this money for social purposes,” he said, “why not tax wealthy people who do not give to charity?”
Short-Term Surge in Giving
By reducing the charitable deduction, Mr. Obama’s plan could create a short-term surge in giving, as wealthy donors rush to make gifts and take advantage of the higher current deduction levels, said Richard Steinberg, an economist at the Indiana University Center on Philanthropy who has studied elevated giving levels in 1986, the year before the tax code was changed to reduce the value of the charitable deduction.
Donations by individuals grew by 14.8 percent in 1986, to $127-billion, and then dropped to $118-billion in 1987, the year the tax change took effect, according to Giving USA, the annual tally of philanthropy.
“The obvious message is that fund raisers could use this to get more donations this year and next year, Mr. Steinberg said.
Neil Kawashima, a lawyer in Chicago who advises wealthy donors, said people who are considering types of giving that offer one-time, upfront charitable deductions on their federal taxes may especially be tempted to consider acting before the deduction rate falls.
Those would include donor-advised funds, which allow people to make contributions to special accounts, claim a deduction, and then recommend how to distribute the money to charity; and “grantor charitable lead annuity trusts,” which allow donors to set up a trust to give annual payments to charities, claim a tax deduction, and then pay taxes on the income produced by the trust.
However, Mr. Kawashima said, fund raisers may have a hard time enticing donors to give more, thanks to the bad economy. “Most people are feeling tapped out already,” he said.
Suzanne Perry and Peter Panepento contributed to this article.