by William Daroff
It seems straightforward as a way to reduce the federal budget deficit: cut tax deductions by $1, and you will increase revenues by $1. But to paraphrase George Orwell: while all tax deductions reduce tax revenues equally, some do more than just reduce government revenue. Some tax deductions put food in the mouths of the hungry, provide shelter to the homeless, and care for vulnerable older Americans. The charitable contribution deduction has been an integral part of the Federal income tax code for nearly 100 years, and it is vital that lawmakers continue to use tax policy to encourage charitable giving, especially during these perilous economic times.
The Obama Administration recently proposed to limit the charitable contribution deduction for “wealthy” Americans, as a way to pay for their jobs bill and overall debt reduction package. Rhetoric-laden phrases such as “tax loopholes for millionaires and billionaires” may be talking points that play well in Peoria, but they also ignore the flip side of the coin – the millions of Americans and billions of people worldwide who are helped by 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 such as 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, we 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. Just consider how many of us make and receive donations during December – the last month of the tax year.
Another misused argument against charitable contributions is that the benefits are “upside down.” Opponents say a millionaire is able to deduct 40 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. Already during this economic downturn, charities are facing devastating revenue shortages while donors cut back, endowments shrink, and government programs are pared to the bone. New roadblocks to giving would only make matters worse.
While we support many components of the Jobs Bill, to finance it by putting at risk such a vital component of the economy is like cutting your nose to spite your face. It is the wrong policy at the wrong time.
William Daroff is the Vice President for Public Policy and Director of the Washington office of the Jewish Federations of North America. Follow him on twitter @Daroff