News and analysis
February 14, 2013

Charities Can Expect Tough Questions on Tax Breaks

Richard White/Chronicle of Philanthropy

The charitable deduction took center stage at a Congressional hearing today as a string of nonprofit leaders warned lawmakers that messing with the tax break could have dire results.

Appearing before the House Ways and Means Committee, charity leaders and academic experts argued that limiting the value of the charitable deduction would dampen giving, forcing nonprofits to curtail services to vulnerable people, and that the tax incentive is unique because it rewards behavior that benefits society rather than the taxpayer.

“Substantially limiting the charitable deduction at a time when people are still reeling from the recession, unemployment is high, and charities are facing government cutbacks simply makes no sense,” said David Wills, president of the National Christian Foundation, testifying on behalf of the Alliance for Charitable Reform.

Debate Is Still Alive

But today’s witnesses might want to keep copies of their testimony handy: Lawmakers made clear that the debate over whether to modify the charitable tax incentive did not die with the New Year’s Day budget deal over the “fiscal cliff.”

Some also signaled they want to discuss broader issues like who benefits most from the charitable deduction and whether nonprofits depend too heavily on government money.

The committee chairman, Dave Camp, Republican of Michigan, said he called the hearing to discuss the deduction because it could be affected by Congress’s plans to overhaul the tax code.

“We want to ensure that whichever policies we ultimately decide to pursue are crafted in a way that makes the tax code simpler, fairer, and easier to comply with,” he said. “We also want to make sure tax reform allows you to continue to meet and fulfill the mission of each of your organizations.”

The committee has set up 11 working groups to prepare for the tax-overhaul debate, including one on charitable organizations.

President Obama has proposed trimming the tax savings wealthy people can get for their charitable gifts as a way to raise revenue, and some Republicans have proposed limiting deductions and loopholes in exchange for lower tax rates.

Colleges and Cultural Groups Benefit

While Mr. Camp’s comments were sympathetic, other lawmakers wondered whether the tax break encouraged giving to the people most in need—a question that often arises because so many donations go to groups like cultural institutions or rich universities.

“When we think charitable deduction, most Americans think, Ah we’re giving to charity, serving the basic needs of those who need it most,” said Rep. Xavier Becerra, Democrat of California. “So much of what’s given doesn’t go to serve those who have the most basic of needs.”

Mr. Camp opened the hearing to anyone who wished to testify, which led to a witness list of more than 40 people—including 13 representatives of local United Way groups who were in Washington to attend a meeting of the charity’s member organizations.

Scholarships and Faculty

Two higher-education leaders told the panel the charitable deduction was critical to encourage private gifts to colleges and universities at a time when they are facing state and federal budget cuts, endowment returns are volatile, and families are struggling to afford higher tuition costs.

“Charitable gifts help institutions fund scholarships for low-income students, recruit top-notch faculty, and strengthen academic programs,” said Jake Schrum, president of Southwestern University, representing the Council for Advancement and Support of Education.

'Big Check’ From Government

Some lawmakers hinted they were itching to explore nonprofit issues beyond the charitable deduction. Rep. Tim Griffin, Republican of Arkansas, said he was shocked to learn that some nonprofits in his district rely on government money for up to 80 percent of their revenue.

He questioned whether it would be more efficient to encourage people to give to them directly, rather than to pay taxes to the federal government, which then trickle down to the nonprofit through the state and county.

“They’ve become dependent nonprofits,” he said. “The tools in the philanthropy tool box rust. They don’t have to court big donors, and they love that. They don’t have to have annual dinners, and they love that. They just get that big check from the federal government.”

Rep. Dave Reichert, Republican of Washington—co-chair of the committee’s new working group on charitable organizations with Rep. John Lewis, Democrat of Georgia—said he hopes to explore issues including whether nonprofits with significant business interests should enjoy tax-exempt status and how to prevent fraud in charitable giving.

He said he and Mr. Lewis would explore ways to increase donations, while “also allowing some fairness in the tax code, and some enforcement, holding those people accountable who might be thinking of taking advantage of certain parts of the code.”

Dig deeper: See all of The Chronicle’s coverage of the charitable deduction, including news updates, research about its impact, and opinion articles.

Send an e-mail to Suzanne Perry.