At first blush, it seems straightforward as a way to reduce the deficit in Washington: Cut tax deductions or tax expenditures (or tax loopholes or tax earmarks, depending on how incendiary you want your language to be) by $1, and you will increase revenues by $1. But to paraphrase George Orwell: While all tax deductions reduce tax revenue equally, some tax expenditures do more than just reduce government revenue. Some tax deductions help put food in the mouths of the hungry, provide shelter to the homeless, and send deserving students to school. The charitable contribution deduction has been part of the Federal income tax code for almost 100 years, and it is vital that lawmakers continue to use tax policy to encourage charitable giving, especially during times of economic recovery.
The Administration recently proposed to limit the charitable contribution deduction for “wealthy” Americans, as part of the solution to the nation’s debt crisis. Rhetoric-laden phrases like “tax loopholes for millionaires and billionaires” are increasingly common without regard for the millions of Americans and billions of people worldwide who are helped by certain charitable tax incentives. According to a recent Gallup poll, this rhetoric also blurs the issue for Americans who overwhelmingly support charitable deductions, but who may not make the connection between “closing tax loopholes” and “encouraging charitable giving.”
Regardless of how the issue is framed, the picture is not pretty for charities. Any limitation on the value of itemized tax deductions, including charitable contributions, will result in fewer dollars flowing to our nation’s charities during a time when they most need financial support. A study released by the Center on Philanthropy at Indiana University calculated that the impact of proposed limitations on charitable giving could result in a decrease of almost $3.9 billion in annual giving.
Limiting the value of charitable contributions is especially catastrophic to charities that operate in a “90-10” fiscal environment. Many charities, especially social welfare organizations like the Jewish Federations that serve as a vital safety net for the most vulnerable, receive more than 90 percent of their total funding from less than 10 percent of their donors. Although Jewish Federations receive hundreds of thousands of donations each year, they still must rely on the giving of top donors to fully support their work. As a result, these and other charities will be particularly vulnerable to this proposal that targets so-called “wealthy” donors.
Although most donors do not give solely because of tax advantages, it is equally true that those who make large gifts often use tax strategies to maximize the effectiveness of that gift, both in terms of timing and the size of the donation.
Another misconstrued argument raised against charitable contribution provisions is that the benefits are “upside down.” Opponents say a millionaire is able to deduct 35 cents for each contributed dollar while a bus driver can only deduct 15 cents. But in fairness, that’s simply because the millionaire is taxed at that matching higher rate as well. This twisted logic should have no bearing in this critical debate.
In times of economic recovery, politicians on both sides of the aisle would do well to remember that the charitable sector is an important engine of economic growth, as well as an indispensable safety net. It is one of fastest-growing segments of economy, contributing almost $1 trillion to the marketplace each year, and accounting for more than 5 percent of GDP, 9 percent of the country’s wages, and nearly 10 percent of jobs in America. Charities are facing devastating revenue shortages while donors cut back, endowments shrink, and government programs are pared to the bone in this new era of austerity. Now is not the time to construct artificial roadblocks to charitable giving.