December 21, 2012

Nonprofits Fight Obama Call to Curb Charitable Deduction

President Obama's plan to allow donors to get tax savings of up to 35 percent on their charitable donations may look like an early Christmas gift to nonprofits that have been aggressively lobbying to protect the tax break from any limits. [Editor's note: the previous sentence and other phrases throughout this article have been revised to more precisely describe the Obama plan.]

But to many charity leaders, that proposal, part of the president's overall $1.2-trillion budget plan presented to Republicans this week, appears to be the same lump of coal as the 28 percent limit he has supported for years.

While the president's latest budget offer died on arrival in the Republican-controlled House, the sudden emergence of a third option for limiting the charitable deduction proved both promising and troubling to nonprofits.

“For the first time the president has changed his position,” said Diana Aviv, chief executive of Independent Sector, a coalition of some 600 nonprofits. “There is a reason to be hopeful that there is flexibility in a position where there hasn’t been before."

But the 35 percent limit, like the 28 percent cap, is not the result Independent Sector and other associations have been demanding.

They want the deduction's maximum value to remain tied to the top income-tax rate, which is set to increase to 39.6 percent for the wealthiest taxpayers once Bush-era tax cuts expire this month. President Obama wants to sever that link and place a cap on the savings a taxpayer could get when writing off charitable gifts.

"A cap on the charitable deduction is a pretty big deviation from current policy," said Alexander Reid, a Washington tax lawyer who previously worked for Congress's Joint Committee on Taxation. "One way of looking at it is if there’s a difference between the 39.6 percent top marginal rate and 35 percent, that's a 4.6 percent tax on those charitable gifts. That’s a substantial change in policy."

Most nonprofit leaders agree that the 35 percent and 28 percent  caps are better than the Republican calls to place a ceiling of up to $50,000 on all tax deductions. Nonprofits fear that taxpayers would max out that dollar cap on the deductions they take for mortgage-interest payments, state and local taxes, and medical care, leaving little tax incentive for giving to charities.

William Daroff, vice president for public policy at the Jewish Federations of North America, said the White House's new proposal indicates that nonprofits are succeeding in convincing the president that the charitable deduction differs from other tax breaks such as for mortgage interest. The proposal floated by the White House called would limit tax savings for other purposes to 28 percent.

Several nonprofit leaders such as Mr. Daroff and Ms. Aviv said they appreciated the president’s recognition that the charitable deduction should be treated differently. But severing the deduction from the tax rate would leave it vulnerable to being lowered again in the future.

“By decoupling it, you create a dangerous precedent,” Ms. Aviv said.

Nonprofits have said changes to the deduction could reduce charitable giving by as much as $7-billion annually.

The Center on Budget and Policy Priorities has said the impact would not be as dire as charities have stated.

"Our view was that even the original Obama proposal of 28 percent was not nearly as bad as the charities were contending," said Paul Van de Water, a senior fellow for the center. "This [35 percent] would have an even smaller effect."

"Going up to 35 percent does seem like a reasonable compromise on the part of the Obama administration if they can get it through," said Lester Salamon, director of the Johns Hopkins Center for Civil Society Studies. "But it depends on what else is done on the other tax battles, if they can get more out of the tax side in the budget than the other side is willing to concede."

Tim Delaney, chief executive for the National Council of Nonprofits, said that the inability of Congress and President Obama to forge an agreement to avoid the fiscal cliff so far indicates that the two sides could eventually land on a deal that is worse than any of the three limits on the charitable deduction that have been publicly debated.

"It’s not one or the other," Mr. Delaney said of the debate over whether to place a cap on the percentage of donations that could be written off or a dollar maximum on all deductions. "There's a huge trap door that we all see beneath us. We're just hoping no one pulls the lever and we all drop through it."