News and analysis
March 15, 2013

Senate Democrats Call for Limits on Charitable Deductions

The federal budget plan released Thursday by Senate Democrats calls for new limits on how much wealthy taxpayers can lower their tax bills through itemized deductions, including those taken for charitable donations.

The proposal is the latest attempt by Democrats to impose limits on tax deductions, a policy that nonprofit leaders say would decimate private giving to charities.

President Obama has repeatedly proposed reducing the value of itemized deductions taken by the wealthiest taxpayers to 28 percent, down from 39.6 percent. Many expect the president’s 2014 budget to reflect that same proposal.

That means people in the highest income-tax bracket of 39.6 percent can reduce their tax bill by $396 for a $1,000 charitable donation. The gift then essentially costs the donor $604.

Under a 28-percent plan, however, the taxpayer’s $1,000 gift would provide $280 in tax savings, meaning the gift would cost $720—a 19-percent increase.

The Senate Democrats’ proposed budget and the White House’s plan could achieve nearly $1-trillion in new revenue because affluent people and businesses that benefit from itemized deductions would pay more taxes on their income.

Four Options

The Senate Democrats’ plan lays out several approaches that could be taken to limit itemized deductions, including those for mortgage-interest payments and state and local taxes.

One would be President Obama’s option of a cap, but the budget proposal does not specifically endorse the 28-percent level. The president has failed repeatedly to pass that proposal.

Another would be a dollar cap on the amount of deductions, an idea floated by Republican Gov. Mitt Romney during the 2012 presidential campaign. Charities fear this option most because taxpayers could max out on a cap with mortgage interest and local taxes and decide not to make charitable donations that had no tax benefit.

A third option, proposed in 2010 by the National Commission on Fiscal Responsibility and Reform, is to replace 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.

Geoffrey Plague, Independent Sector’s vice president for public policy, said the budget proposal also includes an idea endorsed this week in a Washington Post op-ed by Martin Feldstein, a Harvard University economist. Mr. Feldstein supports a cap of 2 percent of adjusted gross income on the tax benefits derived from deductions but wrote that charitable donations should be excluded from such a limit because they benefit the clients of nonprofits more than taxpayers.

Mr. Plague said Independent Sector will be making that same argument in Congress as it tries again to protect charitable donations from such limits.

“The negative impact of limiting the charitable deduction is felt by the people who benefit from the work of public charities,” Mr. Plague said.

Nonprofit Opposition

The Alliance for Charitable Reform, a leading group that lobbies against such limits, immediately opposed the plan.

“The charitable deduction must be preserved and protected in order to sustain the vital work of charities across the country,” Sandra Swirski, executive director of the alliance, said in a statement. “We had hoped the Senate budget proposal would reflect most senators’ overwhelming defense of the charitable deduction that supports meals in food kitchens, breakthrough medical research, arts programs in inner cities, and myriad other community services.”

The Philanthropy Roundtable, an association of donors that manages the alliance, said a reduction in the value of the maximum deduction from 39.6 percent to 28 percent could result in a $5.6-billion decline in giving in one year.

The Charitable Giving Coalition, an alliance of nonprofits, on Thursday sent a letter to Democratic Sen. Patty Murray, chairwoman of the Senate Budget Committee, also warning of potential losses from ideas under consideration. It said that charitable contributions would drop by $3-billion annually if the 2-percent cap on adjusted gross income included charitable gifts and $9.17-billion in donations would be lost under the 12-percent tax credit idea.


Dig deeper: See all of The Chronicle’s coverage about the fight over the charitable deduction.