Charitable Deduction Proposals Stir Debate

Proposals by three blue-ribbon panels to either limit or end the charitable deduction as a way to help reduce the nation's soaring debt have stirred a debate within the sector over tax policies that benefit nonprofit groups, the New York Times reports.

As the proposals have been made public, nonprofits have become increasingly concerned that reducing or eliminating the charitable deduction will cause irreparable damage to nonprofits and the sector. The proposed changes are being floated at a time when public-sector funding and private donations to nonprofits have been flat or declining, even as demand for many services provided by nonprofits is growing. Nevertheless, many experts, including Stanford University associate professor of political science Rob Reich, argue that it is unreasonable for nonprofits to expect a free pass as Congress labors to cut the deficit and reform the tax code so as to make it fairer and raise more revenue. "It's disappointing that the charitable sector, which is broadly committed to improving the well-being of civil society," Reich said, "is in this case indifferent to repairing what's wrong in the country at the expense of protecting its marginal tax advantage."

All three plans propose changes to the deduction in its current form. A plan put forward by the National Commission on Fiscal Responsibility and Reform would give taxpayers a tax credit equal to 12 percent of their charitable donations — but only if they donated 2 percent or more of their adjusted gross income to charity. Another, proposed by Demos, the Economic Policy Institute, and the Century Foundation, calls for a 25 percent tax credit for all charitable gifts, regardless of the donor's income. And a third, proposed by a Bipartisan Policy Center panel, would give nonprofits a tax credit equal to 15 percent of any donation it receives, similar to the Gift Aid system currently in use in Great Britain.

When asked how a system that, in effect, subsidizes nonprofits would affect charities in this country, Joseph J. Minarik, director of research at the Center for Economic Development and a member of the BPC, recalled his experience as director of the Office of Management and Budget in the Clinton administration as the Tax Reform Act of 1986, which lowered tax rates on high-income individuals while closing many loopholes in the tax code, was being negotiated. "One of the things we heard at that time was that reducing the top bracket rates would destroy the not-for-profit sector," Minarik told the Times. Instead, he noted, the legislation eventually reduced the value of a charitable gift to the donor by 24 percent, and giving increased by 10 percent the next year.

Stephanie Strom. "Nonprofits Fear Losing Tax Benefit." New York Times 12/02/2010.