President Obama’s 2010 proposed budget calls for limiting the charitable contributions deduction for taxpayers in tax brackets higher than 28 percent. The purpose of the proposal has nothing to do with charitable contributions or the policy of philanthropy in general. Under the President’s proposal, the additional taxes would be used to lower health care costs and expand health insurance coverage. It seems unlikely, however, that wealthy donors will be affected by the proposal because both the House (H. Con. Res. 85) and the Senate (S. Con. Res. 13) failed to include it in their budget versions.
Rather than using a specific amount to limit the deduction for gifts to charity, the proposal uses the graduated income tax rates to lower the tax benefit derived from the deduction. The two tax brackets higher than 28% are 33% and 35%. If a taxpayer in the 35% tax bracket donated $10,000, his contribution would generate a charitable contributions deduction of $3,500 under the current rules. In contrast, at the 28% tax rate, the deduction would be worth only $2,800. Because the deduction is less, a donor’s taxable income would be greater, and the donor would owe more income tax. Thus, lowering the tax rate for deductions means that the government will take in more taxes.
President Obama asserts that charitable giving will not be adversely affected because there are relatively few taxpayers in the higher brackets. Numerous studies over the years, however, have suggested otherwise. The general consensus is that higher tax rates result in greater charitable contributions. Studies have also shown that reducing the income tax rates results in lower charitable giving, particularly from high-income taxpayers.
The nonprofit sector has reacted quickly in opposition to the limitation. Many charities are already struggling because they are being asked to do more with less government funding. The value of endowment funds has plummeted. Due to layoffs, the credit crunch, and financial uncertainty that taxpayers are dealing with during the economic crisis, it is not surprising that the public is not giving at the pre-recession levels. The financial picture for charities will be even worse if the proposed limitation on charitable contributions deductions prompts their wealthy donors to reduce their giving.
In difficult economic times, our elected representatives, acting on our behalf, must face some tough decisions about our priorities. Is it more important to encourage charitable giving or improve the country’s health care system?
Conrad Teitell Comments on Obama Budget, Taxwise Giving (March 2009), reprinted in Planned Giving Design Center.
Gerald E. Auten, James Cilke and William Randolph, The effects of tax reform on charitable contributions (National Tax Association Symposium: Taxes and Spending in the Age of Deficits). National Tax Journal, National Tax Association (1992), reprinted in HighBeam Research (Apr. 2, 2009)
Mark D. Hoffman, Hearings to Be Conducted on Limiting the Value of Deductions for Upper-Income Taxpayers, Planned Design Giving Center, reprinted in Evangelical Council for Financial Accountability (2009)
Federal Budget Plan for FY 2010, Independent Sector (2009)
To read more about the President’s budget plan for 2010, see President Obama’s Fiscal Year 2010 Budget, Committee on the Budget, U.S. House of Representatives (Feb. 26, 2009)