News and analysis
April 08, 2013

Obama to Renew Call to Limit Charitable Deduction

White House estimates new limit would generate $321-billion in revenue through 2021

Richard White/Chronicle of Philanthropy

President Obama is expected to renew his call to limit the charitable tax deduction when he releases his 2014 budget plan on Wednesday—a proposal that nonprofits have repeatedly helped defeat.

“The President’s proposal, as you know, includes the provision that would cap deductions for wealthier Americans at 28 percent—a very common-sense proposition,” White House spokesman Jay Carney said at an April 5 news briefing.

When asked how Mr. Obama would overcome opposition from both parties due to worries about the impact on charities, Mr. Carney said the president was confident he could forge a compromise with a “common-sense caucus,” according to a transcript of the briefing.

The Democratic president has failed since 2009 to impose a 28-percent limit on the value of itemized deductions for such expenses as mortgage interest, state and local taxes, and gifts to charities as a way to help tame the federal budget deficit.

A coalition of charities helped head off the president’s most recent attempt when the White House and Congress reached a budget deal on January 2. In fact, that agreement actually increased the value of itemized deductions by raising the top marginal income tax rate to 39.6 percent from 35 percent. Because the charitable deduction is tied to a person’s tax rate, donors in the highest bracket are now able to get a tax savings of 39.6 cents for every dollar donated to charity.

That means a $1,000 contribution would cost a taxpayer $604.

The 28-percent proposal would limit the value of the deduction to $280 on that same gift, increasing the cost of the donation to $720, or by 19.2 percent.

The White House estimates that the new limit would generate $321-billion in additional revenue through 2021, according to the Tax Policy Center.

Obama administration officials have said that the change would affect only high-income taxpayers—singles with incomes in excess of $200,000 and married couples with incomes above $250,000. Taxpayers with incomes below those levels who do not itemize deductions would not be affected—“the vast majority of donors,” Jacob Lew, the new Treasury secretary, said.

But nonprofit advocates say the proposal could reduce donations by as much as $9-billion annually.

The Senate’s budget proposal for 2014, approved last month, called for considering several methods for limiting deductions. It mentioned ideas including replacing the deduction with a 12-percent tax credit that would be available only for amounts beyond 2 percent of a taxpayer’s adjusted gross income; a dollar cap; and a limit of 2 percent of adjusted gross income on the tax benefits derived from deductions (although the chief proponent of that idea wants to exclude charities from such a limit). The House budget does not mention itemized deductions.

Steve Taylor, vice president for public policy at United Way Worldwide, said there is no indication that the White House intends to carve out the charitable deduction from the 28-percent cap proposal.

“It’s going to be the same as always,” Mr. Taylor said. “We wish they would see the light.”

The Charitable Giving Coalition, which has led the fight against limits, has already mobilized to beat back the latest effort as well.

“The charitable deduction is different than other itemized deductions in that it encourages individuals to give away a portion of their income to those in need,” states a March 14 letter that the coalition sent to Sen. Patty Murray, the Washington Democrat who chairs the Senate Budget Committee. “It is not a tax cut for the wealthy.”

The coalition states that a 28-percent cap would result in a loss of $1.7-billion to $5.6-billion each year.

A dollar cap would be “even more devastating,” the coalition says, because taxpayers would hit the maximum deduction on mortgage interest and local taxes before calculating charitable gifts.

Donations would drop $3-billion if a 2-percent adjusted-gross-income floor were imposed, the letter states. And $9.17-billion could be lost if a 12-percent tax credit replaced the deduction.

The coalition launched a new Web site last week, to help organize its opposition.

Send an e-mail to Doug Donovan.