November 11, 2010

Deficit Commission Targets Charitable Deduction

The proposals issued Wednesday by the co-chairs of President Obama's deficit commission took aim at a variety of sacred cows—including the charitable deduction.

Erskine Bowles, a Democrat, and Alan Simpson, a former Republican senator, urged the full commission to consider limiting tax breaks, including those for charitable donations, as a way to rein in the country's ballooning budget deficit.

They said one option was to set a floor of 2 percent of adjusted gross income. In other words, taxpayers could not get deductions for any dollars spent on charity below that level.

They proposed another option that does not explicitly mention the charitable deduction but could affect it as well. That proposal calls for an end to all tax breaks in exchange for slashing tax rates to a range of 8 percent to 23 percent (compared with today's range of 10 percent to 35 percent).  If Congress wanted to add back any of the breaks, it would have to pay for them by raising the tax rates.

A third proposal would limit the percentage of itemized deductions that taxpayers could take if Congressional committees and the Treasury Department have not finalized a plan to overhaul and simplify the tax system by the end of 2012.

The full commission is supposed to issue its recommendations by December 1, and many observers suspect it will bypass some of the co-chairs' more controversial ideas.

The proposal to set a floor for the charitable deduction was in a section of their plan called "Wyden-Gregg Style Reform," after a bill drafted earlier this year by Senators Ron Wyden, Democrat of Oregon, and Judd Gregg, Republican of New Hampshire.

But Senator Wyden has distanced himself from any effort to alter the charitable tax break. "Senator Gregg and I considered limits on mortgage and charitable deductions too politically controversial to include in our legislation," he said in a statement.

Jacob I. Friedman, a nonprofit tax lawyer in New York, said requiring taxpayers to spend 2 percent of their adjusted gross income on charity before getting a deduction would be "devastating" to charities, especially given how much they rely on small donors.

But Jack Siegel, a Chicago lawyer, praised the package of proposals, calling them a "good faith effort" to "spread the pain around" in an effort to address the country's serious budget problems. Ending all tax breaks, including the charitable deduction, he wrote on his blog, would "greatly simplify the tax system, saving billions of dollars in compliance costs."