A higher estate tax, as envisioned in a proposal released by President Obama this weekend in advance of Tuesday’s State of the Union speech, would spur more charitable giving in the form of bequests and charitable trusts, according to some nonprofit tax experts.
The estate-tax increase was included in a broad proposal to raise taxes on the most wealthy Americans and reduce the burden on poor and middle-income taxpayers. His proposal would increase fees on big banks that are highly leveraged and expand tax credits for the working poor, child care, and college tuition.
President Obama’s proposal would raise the capital-gains tax, paid on inheritances of money and property, from its current rate of 23.8 percent to 28 percent for high-income tax filers. In addition, the tax plan would close what some tax specialists call the “trust-fund loophole.”
Instead of taxing an asset, like a share of stock, at the price at which it was originally bought, the plan would tax any gains in the stock's value when it is passed to others after the owner’s death. However, the plan would maintain an exemption for assets that are given to charity.
According to the White House, 99 percent of the proposed tax hikes would fall on the top 1 percent of taxpayers, as measured by income. About 80 percent of the increased government revenue would be from higher taxes on the top 0.1 percent, or those with incomes higher than $2-million a year, according to the administration.
Throughout his presidency, President Obama has offered plans in his annual budget proposals to cap the charitable deduction. Mr. Obama did not mention the deduction in his tax-plan synopsis released by the White House over the weekend, but it is likely he will reprise his push to cap the deduction. Those efforts have been fiercely resisted by nonprofits. But his estate-tax and tax-credit proposals will likely get a much different response.
An estate-tax increase would provide a huge benefit to charities because donations to these groups would become the only easy way to legally avoid capital-gains taxes, according to Len Burman, director of the Tax Policy Center.
Rather than pass assets down to heirs and incur a higher tax levy, more wealthy tax filers will chose to bequeath their assets to charities upon their death, Mr. Burman said.
“The president has locked up the philanthropic sector vote,” he wrote in TaxVox, a blog maintained by the center. “Except, of course, he isn’t running again.”
Steve Taylor, senior vice president for public policy at United Way Worldwide, hopes that by maintaining the exemption for charitable gifts, Mr. Obama is signaling he won’t push for new limits on the charitable tax deduction.
“That carve-out for gifts to charity is a significant indication that the administration understands tax policy can drive charitable donations,” he says.
The tax plan was immediately slammed by Republicans, who control both chambers of Congress, and the likelihood of an agreement between President Obama and GOP lawmakers remains slim, especially on any proposal that would raise tax rates.
Still, Mr. Taylor lauded Obama’s plan to expand tax credits for college payments, child care, and the working poor, saying the White House “took a page right out of the United Way's playbook.”
He predicted those items would be a good sell on Capitol Hill, among both Democrats, who favor a progressive tax code, and Republicans, who have pushed for tax policies that encourage people to work.
“These are the kinds of policies both Democrats and Republicans can rally around,” he says. “When you talk to folks about these things, you might adjust your message accordingly.”
Correction: An earlier version of this article misstated President Obama's long-held position on the charitable deduction, which is that it should be capped.