Republican leaders would preserve the charitable deduction under a new tax proposal made public Wednesday, a key battle line for nonprofit leaders racing to ensure giving incentives remain intact as lawmakers try to rework the tax code.
However, the plan would roughly double the standard deduction, meaning millions fewer taxpayers would itemize their tax returns. That change could reduce the value of the charitable deduction as a tax incentive and depress giving, some research shows.
The Trump White House and congressional leaders say they want to simplify what they describe as an overly complicated tax code. Their plan would also reduce the existing seven individual income-tax brackets to three — with tax rates of 12, 25, and 35 percent — while leaving open the possibility for a higher tax rate for the wealthiest individuals.
The nine-page plan is the starting point for what could be months of negotiations as lawmakers try to overhaul the tax code. It is the work of top White House and congressional tax policy makers, a group dubbed the “Big Six.”
Speaking in Indianapolis on Wednesday, President Trump said the tax plan would put more money back into the hands of individuals and businesses and spur economic growth. He called it a once-in-a-generation legislative effort. The standard deduction for an individual would be increased to $12,000, while the standard deduction for a couple would increase to $24,000, he said.
“In other words, more income for more people will be taxed at a rate of zero,” President Trump said.
Unintended Consequences
The new framework is a good step insofar as lawmakers needed to get it out to move forward with legislation, said Hadar Susskind, senior vice president for government relations at the Council on Foundations. But he added he is still awaiting more details.
“It talks about individual rates a little more specifically than in the past, although there is still some wiggle room there, too,” he said, describing what might happen to marginal tax rates.
At the least, Mr. Susskind and others said they are pleased the new framework would maintain the charitable deduction.
“The charitable deduction is literally a lifeline for the millions of Americans and people around the world who are depending upon charities to live,” said William Daroff, senior vice president for public policy at the Jewish Federations of North America. “We see that clearly with the hurricanes we have been dealing with over the last couple of months and the key role charities play in that.”
But there are serious concerns about what the doubling of the standard deduction could do to charitable giving and other unintended consequences that might come with changes to the tax code.
“Doubling the standard deduction and keeping the charitable deduction in its current form would lead to a $13 billion reduction in giving each year,” Dan Cardinali, CEO of Independent Sector, said in a statement. “This loss does not include the additional sharp decrease in giving that will result from the proposed repeal of the estate tax.”
The failure to repeal and replace the Affordable Care Act has put a lot of pressure on lawmakers to score a big legislative victory before the end of the year, said Sandra Swirski, executive director of the Alliance for Charitable Reform.
Ms. Swirski worries that the charitable deduction would lose some of its value for taxpayers under the approaches Republicans are considering, regardless of whether a broad tax overhaul or a limited reduction in rates is considered.
“Whether we get reform or we just get tax breaks, the charitable deduction is going to be in play,” she said. “I think the deduction is at risk in either scenario.”
However, she said the document offered some hope. Her group and other charity leaders are pushing for what they call a “universal” charitable deduction, which would allow all American taxpayers to claim a write-off for charitable gifts without itemizing. She noted that the guidance offered today did not single out the existing charitable deduction as the sole means to incentivize giving.
“They didn’t specifically say ‘the charitable deduction,’ they said ‘charitable-giving incentive,’ which provides Congress some wiggle room to craft an alternative to the charitable deduction,” she said. “It leaves ample room for a universal charitable deduction.”
More Work to Be Done
In July, members of the Alliance for Charitable Reform met with Vice President Pence to push for a universal deduction. And since the current Congress was gaveled into session, nonprofits have blanketed Capitol Hill to push lawmakers to retain charitable-giving incentives. Still, neither the House Ways and Means nor the Senate Finance committee, Congress’s two tax-writing panels, have scheduled hearings that will include testimony from nonprofits to discuss tax changes. And at least some nonprofit leaders expressed frustration Wednesday that lawmakers haven’t yet embraced their calls for the universal deduction.
“I’m deeply disappointed Congress hasn’t budged on the charitable-giving problems we’ve been pointing out to them,” said Steve Taylor senior vice president at United Way Worldwide. “It’s clear they have not heard our sector.”
Mr. Taylor said United Way may scrap planned January visits with lawmakers from two groups of its local executives and instead schedule trips before the end of the year to make sure their voices are heard during the debate.
Also on some nonprofit leaders’ minds: Tim Delaney, president of the National Council of Nonprofits, said that the elimination of the estate tax, a longstanding Republican goal that is included in the president’s plan, could also hit nonprofits hard.
Getting rid of the estate tax would give richer taxpayers less of an incentive to reduce their tax liability by making charitable contributions. Eliminating it would also reduce the amount of money available to the U.S. Treasury and ultimately result in budget reductions for domestic programs often run by nonprofits that receive government grants, Mr. Delaney said.
“Nonprofits will have less revenues to advance their missions,” he said. “The people who actually get hurt the most will be the people of America.”
On Wednesday, President Trump described the estate tax as “a disaster for this country and a disaster” for small businesses and small farmers, saying, “We are getting rid of it.”
This story has been updated with reaction to the tax proposal.
Correction: A previous version of this article referred to the Jewish Federations of America instead of the Jewish Federations of North America.
