For the fourth time since he took office, President Barack Obama on Monday proposed putting a limit on the percentage of income wealthy donors can write off for gifts to charity.
Under his 2013 budget proposal, which was released Monday, families with incomes of $250,000 or more would be able to write off 28 percent of the amount spent on charitable gifts when they itemize their taxes. Right now, donors can write off 35 percent.
The plan also recommends allowing Bush-era tax cuts for the wealthy to expire and supports requiring families who bring in $1 million or more to pay at least 30 percent of their income in taxes.
Members of the nonprofit community expressed concern that, together, these proposals will discourage the wealthy from donating to charity.
"The president is sending mixed messages to the charitable community," said Sue Santa, senior vice president of the Philanthropy Roundtable, a national network of individual donors, corporate giving officers and foundation trustees, in a news release. "On one hand, he wants to limit the charitable deduction. On the other, he wants millionaires to continue to give to charity while also paying higher taxes."
Nathan Diament, executive director of public policy for the Union of Orthodox Jewish Congregations of America, called the charitable deduction "the most powerful tool America's charities possess to raise funds that enable them to serve their brothers and sisters."
"Even in good economic times, a proposal such as the one put forth in the president's budget would adversely affect America's charities," he said in a news release. "In these distressed times, in which charities are serving more people's needs while at the same time continuing to suffer a downturn in donations, the proposal to reduce the rate of tax deductibility for contributions is a recipe for harmful displacements and cuts in much-needed nonprofit sector institutions and services."
Americans who make more than $200,000 per year donate about $100 billion annually to charity. If the charitable deduction is cut or limited, this figure would likely drop by $5 to $7 billion, according to a study released this month by Dunham+Company, a Texas-based strategic fundraising consulting company and a leader in fundraising research.
Seventy-eight percent of American adults believe the charitable deduction should not be cut or capped, according to the study. Seventy-three percent believe private charities are more cost effective in promoting social good than the government.
"The attitude among the American public regarding the charitable tax deduction is clear: Regardless of household income, education, age, race or gender, Americans overwhelmingly support the current tax deduction for charitable contributions," said Rick Dunham, president and CEO of Dunham+Company.
After alluding to a tax hike for the wealthy in his State of the Union Address last month, Obama said he would "work to ensure that this rule is implemented in a way that is equitable, including not disadvantaging individuals who make large charitable contributions."
Those who support cutting or limiting the charitable deduction argue the current tax law favors the wealthy.
"The current tax treatment of charitable donations is not phrased as a subsidy, but that is just semantics," wrote University of Chicago economics professor Richard H. Thaler in an op-ed for The New York Times. "If someone in the 36-percent tax bracket gives $1,000 to charity and deducts it from his income tax, the donation costs him only $640. The government picks up the rest. That's a subsidy."
In a blog post for The New York Times, Princeton economics professor Uwe E. Reinhardt further pointed out that low-income people who pay only payroll taxes get hardly any leverage for their donations.35 comments on this story
"Very high-income people in states with high income-tax rates — such as New Jersey and New York — can through the tax code virtually double the money funneled to a charity per dollar of their own sacrifice," he wrote. "Is that fair?"
Obamas proposal comes after a fall Senate hearing in which deductions for charitable giving were defended by religious leaders, including Elder Dallin H. Oaks of the Quorum of the Twelve of The Church of Jesus Christ of Latter-day Saints.
The charitable tax deduction, Elder Oaks said, is vital to the private sector that is unique to America. It provides much of the funding for countless organizations, both religious and charitable, that are responsible for tens of millions of jobs and innumerable services that benefit our citizens at every level.
During the question-and-answer portion of the hearing, Elder Oaks added, If the charitable deduction is modified in substance not in the details, but in the substance that will be a teaching message that charitable works are less important in our view than the works of government. It is that message that I speak against.