When I met with Florida’s congressional representatives and their staffs earlier this year to talk about issues of importance to philanthropy, time and time again people from both parties told me that comprehensive spending and tax reform is likely to happen in Washington in 2013 or 2014—no matter who wins the presidential election this fall. Since most legislative issues of interest to foundations and charitable giving concern federal tax legislation, if we want to be relevant the philanthropy sector should consider how to position and discuss these issues within a broader tax reform context. A new Urban Institute study can help.
Last week I moderated a webinar hosted by the Forum of Regional Associations of Grantmakers that featured Eugene Steuerle, one of the authors of a new study by the Urban Institute’s Tax Policy and Charities project. The study offers some helpful food for thought about the future of one of the most prominent charitable giving issues that is likely to be part of any tax reform negotiations: the charitable contribution deduction.
In the webinar, Steuerle noted that Congress enacted the charitable deduction back in 1917, just four years after establishing the income tax. According to Steuerle, a key reason why Congress enacted the charitable deduction was to provide an incentive for charitable giving to help support the types of services that would not be supplied sufficiently by the free market or government alone. This argument remains a key rationale for the charitable deduction to this day.
In their report, Steuerle and his Urban Institute colleagues analyzed three of the main options that have been proposed by policymakers in recent years for changing the charitable deduction to raise more government revenues:
- Caps on the charitable deduction that would limit the size of the tax benefits for donors, such as the 28-percent cap in the Obama Administration’s 2013 budget, which would mean that individuals subject to the two highest tax rates—currently 33 percent and 35 percent—would see the tax benefit of their charitable deductions reduced;
- Floors that would allow deductions for a person’s total charitable giving above a set amount, such as a proposal in a 2011 Congressional Budget Office report to allow itemizers to reduce their taxes for all charitable contributions above 2 percent of their adjusted gross income;
- Credits that would reduce a person’s taxes by a set percentage of his or her donations, such as a proposal in a December 2010 report by the President’s Commission on Fiscal Responsibility and Reform to eliminate the charitable deduction and give taxpayers a tax credit equal to 12 percent of their charitable donations (but only for donations above 2 percent of their adjusted gross income).
The Urban Institute study found that although these three options all raised similar amounts of revenue for the government, they had different impacts on charitable giving. Caps and credits had the biggest negative impact on charitable giving, while floors had little impact on giving. A key reason why caps reduce charitable giving much more than floors is because some studies have shown that giving incentives like the charitable deduction have a bigger incentive on the last dollars given, not the first. In other words, many people are going to give some money to charity anyway, whether or not there is an incentive, so the charitable deduction does not necessarily encourage people to give, but to give more. With a cap, there’s no incentive to give above a certain amount, but with a floor there is.
According to a 2011 study by the Center on Philanthropy at the University of Indiana, charitable giving would have decreased by $2.43 billion in 2010 had the Obama Administration’s 28-percent cap been in effect. That’s billions of dollars that wouldn’t go to help nonprofits meet myriad critical needs in our communities—from feeding the hungry to housing the homeless. All this at a time when many charities are seeing big drops in funding from all sources and rising demand for their services.
On the other hand, the Urban Institute study found that the best option for modifying the charitable deduction was a 1.7 percent AGI floor (allow itemizers to reduce their taxes for all charitable contributions above 1.7 percent of their adjusted gross income) combined with a deduction for non-itemizers. This combination raised the same amount of revenue as a cap and other options, but with a minimal decline in charitable giving.
As the country moves forward with serious discussions on spending and tax reform, there will no doubt be much more analysis and debate about the charitable deduction and other important tax issues that could impact philanthropy. Reports like the one from the Urban Institute can help the philanthropy sector be an effective contributor to broader tax reform discussions while also ensuring a healthy and viable nonprofit sector in Florida and nationwide.
- David Biemesderfer, President & CEO, Florida Philanthropic Network