The fierce debate on health care and its eventual outcome may affect charitable giving by Americans. The Association of Fundraising Professionals, in late June, issued a warning to its members and to the general public asking them to advocate against two proposed tax approaches that the Obama Administration has proposed in order to pay for health care.
Two forms of a limitation on charitable deductions have been touted as a means of paying for health care reforms:
The Obama Proposal: For those individuals who earn more than $200,000 (and those couples and families who earn more than $250,000), this proposal would limit the federal tax deduction they may take for their generosity to 28 percent (starting in 2011). Currently, they may claim up to a 35 percent deduction. This tax policy change would effectively devalue charitable gifts made by the very people who are in a position to make substantial donations at a time when they are sorely needed.
The Alternative Proposal: When the tax rate likely increases to 36% and 39.5 % for certain taxpayers in 2011, their charitable deduction would not be increased proportionately. Instead, it would remain at its current levels (33% and 35% respectively).
The AFP characterized these proposed tax changes as “harmful limits on charitable deductions to fund health care reforms” and urged its members to contact their Congressional representatives immediately to oppose these measures.
AFP opposes both proposals and any other proposal that would impose limits on charitable tax deductions. Both of these proposals would create a disincentive for taxpayers who give the most to charitable organizations to continue their generosity. Moreover, both proposals, in essence, impose a tax on charitable giving.
Last year in the US, individual Americans gave 76% of the $307 billion that was raised in the private sector through charitable giving. Those dollars are devoted to fund nonprofit activities that bolster education, provide health care and mental health services, address environmental concerns, fund the arts and promote citizenship. By changing the tax laws, the federal government would reduce the impact by the nonprofit sector, leaving many of these vital programs under- or unfunded. In the worst cases, it would put some nonprofits out of business.
Obama's tax plan could cause giving by the wealthy to drop by several billion dollars annually. According to a study by the Indiana University Center on Philanthropy, Obama’s tax proposals — including a limit on charitable giving deductions that could be taken by America’s wealthiest people — could cause giving by America’s wealthy to drop by several billion dollars a year.
The Center looked at how the proposals Mr. Obama released in early 2009 would have affected giving based on 2006 data showing how much taxpayers deducted for charitable contributions. It said that if Mr. Obama’s tax plan had been in effect, Americans with incomes of $250,000 or more would have decreased their giving by 4.6 percent or nearly $3.9-billion. People at that income level claimed more than $81-billion in charitable gifts in 2006.
In a statement, Patrick M. Rooney, interim director of the Indiana center, said he worried about the effect of the tax change at a time when the downturn in the economy has put a squeeze on many donors and the charities they support.
“Tax incentives do stimulate more giving,” Mr. Rooney said, “and the challenges facing the nonprofit sector in 2009 suggest that this might be a good time to provide additional incentives, rather than reduce the value of the tax deduction for high-income households, so that the donors with the greatest capacity to give have more reasons to do so.”
Michael Peregrine, a partner at McDermott Will & Emery who represents nonprofits, says the proposal, combined with a sluggish economy and tax hikes for the wealthy, forms a “triple-play” against charitable donations. Independent Sector, a nonprofit lobbying group in the nation’s capital, worries the cap could be a “disincentive” for donors.
In these challenging economic times, charities and nonprofits already are finding it difficult to fulfill their altruistic missions because of reduced donations and resources. Yet, in times of economic trouble, it is charities and nonprofits that do much to augment the work of the federal, state and local government in meeting the needs of the American public through their vital programs and services. In fact, charities currently are being asked to provide even greater levels of assistance. The federal government, therefore, should seek ways to bolster charitable giving—as opposed to requiring charities to do more with less.