The Less-Than-Charitable Cost of Tax Reform
by William Daroff
If your household is like mine, you made your yearly charitable donations to a number of worthy causes last month, trying to get under the wire for the year’s tax deduction. But if the administration proposal to limit deductions passes Congress as a part of broader tax reforms, your annual contributions might actually cost more in the future. As this important conversation progresses, it is crucially important that Congress not alter the charitable contribution deduction.
Currently, the tax-writing committees in Congress are debating proposals to fundamentally change the tax laws. The debate over this legislation will undoubtedly involve impassioned floor speeches about large corporations and loopholes.
It is important to remember that the charitable contribution deduction is a “lifeline and not a loophole.” I hope the debate will also reference the charities working to provide shelter to the homeless or feed the hungry, the after-school programs keeping children off the streets and the small businesses giving back to its community by stocking the local food pantries. This debate must also be about you and me giving what we can to help those in need, and the charitable contribution deduction makes this possible.
Should the charitable contribution deduction be cut, capped or limited, the results could be catastrophic for those who need it the most. Currently, the top statutory tax rate for income and charitable deductions is 39.6 percent. The “after-tax cost” for high-income taxpayers is $604 for a $1,000 charitable contribution. In a proposal put forth by the administration earlier this year, the tax benefit of all itemized deductions – including charitable contributions – would be capped at 28 percent. The difference is substantial – the net cost of that $1,000 donation would rise to $720. This increased cost will translate into a significant drop in giving – almost $10 billion annually according to a well-respected Washington think tank.
Limiting the value of charitable contributions would be especially catastrophic to charities such as the Jewish Federations that operate in a “90-10” fiscal environment. Many charities receive more than 90 percent of their charitable contributions from less than 10 percent of their donors. While we and many other nonprofits receive hundreds of thousands of donations each year, we still rely on the charity of top donors to support our work in the community. Although most of these top donors do not give solely because of tax advantages, they often use tax strategies to maximize the effectiveness of that gift, in terms of both timing and the size of the donation.
The charitable contribution deduction has been part of the tax code for almost a hundred years, and it is vital that lawmakers continue to use tax policy to encourage charitable giving, especially in current economic conditions. We are grateful that a bipartisan group of legislators has recognized the importance of protecting this deduction as Congress rewrites the tax code. Key members of the Senate Finance Committee – John Thune, R-S.D., and Ron Wyden, D-Ore. – have sent letters to their colleagues urging the protection of the charitable donation deduction. The senators reminded their colleagues that proposals to cut, cap or limit deductions would cost nonprofit and philanthropic organizations billions of dollars each year.
Even in our fragile economy, Americans still want to give back to those who need help the most. However, charitable giving will suffer should the deduction be limited. It is crucial that Congress follow the leadership of Thune and Wyden and protect the charitable contribution deduction. If Congress cuts, caps, limits or alters the deduction, the results could be devastating for those who need help the most. Now is the time for reaching out and helping those less fortunate – not to make it more difficult to help those in need.
William Daroff is the senior vice president for public policy and director of the Washington office of the Jewish Federations of North America.
This opinion piece first appeared in Roll Call.