December 18, 2012

Obama Plan Would Spare Charitable Deduction

Nonprofits seeking to protect charitable deductions may have won at least one victory: President Obama's budget proposal given to Republicans on Monday appeared to single out the charitable deduction for a more-generous write-off by the wealthy than mortgage interest, state taxes, or other tax breaks.

Republicans rebuffed the president's overall proposal on Tuesday in the continuing back-and-forth of "fiscal cliff" negotiations. But nonprofit leaders were abuzz with the prospect that their coordinated advocacy to protect the charitable deduction may be paying off.

President Obama has long favored lowering the maximum amount wealthy taxpayers can deduct from their taxes for charitable gifts, from the current 35 percent to 28 percent. That means a $1,000 gift would reap a $280 tax savings instead of $350.

But his proposal Monday called for a 35-percent rate cap for charitable deductions while limiting deductions for paying mortgage interest and state and local taxes to 28 percent.

"It seems favorable that there would be a cap on most deductions but a higher one on charitable deductions," said Deborah Weinstein, executive director of the Coalition on Human Needs.

Ms. Weinstein, like other nonprofit officials, was unable to confirm the proposal with White House officials, but its details were circulating throughout the day. Politico Pro reported that charitable deductions would be capped at 35 percent. The White House would not verify the numbers, but in a press briefing, Obama spokesman Jay Carney said: “There are a series of other pieces of his revenue proposal that deal with some reform measures, like capping deductions and other issues.”

Gary Bass, executive director of the Bauman Foundation and a veteran Washington insider, said Independent Sector's two-page advertisement in the newspaper Politico last week advocating for the charitable deduction "stirred things up quite a bit."

The letter, which called for preserving the charitable deduction, was signed by more than 900 nonprofit leaders. It came a week after more than 250 nonprofit officials hit Capitol Hill in a lobbying day to protect the charitable deduction.

"The Republicans responded by saying that their intent is not to undermine charities," Mr. Bass said. "So I think there is sensitivity to the charitable deduction right now."

"The White House had been quite happy with 28 percent before," he added.

Independent Sector's chief executive, Diana Aviv, said widespread advocacy from nonprofits across the nation was having an impact. She, too, had not been able to confirm the White House proposal.

"Whatever gets put forward is only true in the moment that it is put forward," Ms. Aviv said. "It would not be right to assume anything just yet."

But, she added, "it would be encouraging if the president had done that for sure."

"If there is fluidity and movement in regards to treating the charitable tax deduction differently than other deductions, then that’s terrific," Ms. Aviv said. "It means the community’s voice has been heard."

Mr. Bass agreed with Ms. Aviv that so many proposals are being thrown around that it is not time to think conversations about charitable-deduction limits are over. In particular, nonprofit advocates expect the real-estate lobby to protest the placement of the 28-percent limit on mortgage interest deductions.

"Let's face it, when push comes to shove, the real-estate agents are going to be in there, too," Mr. Bass said. "They carry more clout in terms of political contributions."

United Way Worldwide’s senior vice president for public policy, Steve Taylor, said separating the charitable deduction from others would be a “positive step” if it is true.

His organization, however, would prefer not to see a 35-percent cap. Instead, it wants to continue to tie the maximum deduction to the top income-tax rate, which is currently 35 percent. President Obama wants to raise the top rate to 39.6 percent on income over $400,000. Mr. Taylor said an ideal result would be for the maximum charitable deduction to increase with the top rate.

“You just don’t want to go down the road of decoupling the deduction rate from the marginal tax rate,” Mr. Taylor said. “We still have a long way to go.”

Paul Van de Water, senior fellow at the Center on Budget and Policy Priorities, said the president's Monday night proposal, calling for $1.2-trillion in new revenues, is a compromise from his original $1.6-trillion plan. The $400-billion difference, driven mainly by the president's compromise to apply higher tax rates to income over $400,000 instead of $250,000, may have to be made up in spending cuts to social programs that would hit nonprofits hard.

That's what scares Ms. Weinstein.

"For us it is disappointing to extend the tax cuts beyond the $250,000 level," she said. "Because we need the money."