Obama plan to cut charitable deduction worth debating

[Editor’s note: This article first ran in The Cohen Report, a publication of The Nonprofit Quarterly.]

Rick Cohen
Rick Cohen

Rick Cohen

Charities and foundations appear to be nearly unanimous in their opposition to President Obama’s plan to decrease the deductibility of charitable donations by high-income households from 33 percent and 35 percent to the middle-income tax bracket of 28 percent.

The proposal merits more discussion than knee-jerk opposition to any policy proposal that might cause a reduction in charitable giving, especially if the outcome for nonprofits and society at large might be a net positive.

Much of the opposition has made it appear that Obama was attacking or singling out charitable deductions.

Not true.

In this case, Obama proposed to reduce all itemized deductions to 28 percent, including mortgage-interest deduction and others, as well as the charitable deduction.

A charitable donation of $10,000 that used to get a tax deduction of $3,500 for wealthy taxpayers and families above $250,000 in income in the 35 percent tax bracket would lead only to a $2,800 deduction like that afforded to middle-income taxpayers.

What would Obama do with the new federal revenues?

He pledged to put all of the money into a $634 billion reserve fund to help pay for part of the $1.3 trillion cost of comprehensive health reform.

The effect of Obama’s proposal is fundamentally to pay for at least part of the cost of health-care reform by raising taxes on the wealthy, an idea endorsed by 71 percent of Americans, according to polls conducted by the Kaiser Family Foundation.

Opponents have suggested the tax change would deprive charities of desperately needed donations at the time when they most need them, a deep and long recession.

Not true again.

In Obama’s budget, the change in deductions wouldn’t occur until 2011.

His budget director, Peter Orszag, says that would be delayed further if the recession were still in effect two years from now.

Would recession-fighting charities lose out?

Estimates from the Center for Budget and Policy Priorities indicate the proposal would affect only the top 1.2 percent of taxpayers and result in a 1.3 percent decrease in charitable giving.

That’s still $4 billion to $9 billion lost in charitable giving, according to reputable economists.

But the charities most affected by charitable donations of the top givers are universities, hospitals, museums and symphonies, as any list of donations from high-net-worth individuals reveals.

Contrary to losing, charities might actually gain, directly and indirectly.  Forty-five million non-elderly uninsured people live in the U.S., although one study indicated that in 2008 as many as 77 million people spent some period of the year without health insurance.

Who pays for the costs of health care for the uninsured?

The nation pays $176 billion for providing health care to the uninsured, three-fourths of it from federal and state government sources, one-fourth from private charity.

It shouldn’t be a surprise.

The uninsured can be seen in hospital emergency rooms and neighborhood health clinics hoping to get free treatment.

Eight of 10 uninsured are in working families, most with incomes below $42,000, or twice the federal poverty level.

A that income or salary, the uninsured might well be the typically underpaid staff of nonprofits themselves, and surveys of nonprofits show that many smaller nonprofits, with revenues below $250,000, frequently offer little or no health insurance to their employees.

Nonprofits throughout the U.S. are suffering because of skyrocketing health-insurance premiums, the communities they serve are often without adequate insurance, and statistics show that even insured families frequently skip treatments and prescriptions because they can’t afford the costs of co-pays.

But nonprofits of various political hues have been quoted in the news media as opposing Obama’s plan to reduce deductions to help pay for comprehensive health-care reform.

Those nonprofits include the Council on Foundations, Independent Sector, and the Alliance for Charitable Reform.

Their arguments more or less hang on the possible reduction in charitable donations, even though donations account for only 12.3 percent of nonprofit revenues, with one-third of those donations going to religion.

In Congress, most Republicans and some Democrats have expressed major misgivings about the idea.

A bipartisan group passed a “sense of the Senate” resolution signaling Obama that most legislators were unconvinced that altering the charitable deduction should be part of the financing scheme for health care reform.

It is unclear whether any of the changes in the value of the charitable deduction or the mortgage-interest deduction, decried by the real estate industry with the same fervor, made it through the Democrats’ budget agreement in late April.

In the “U-shaped” curve that characterizes the income distribution of charitable givers, some arguments suggest the super-wealthy are not strongly motivated by tax deductions to stimulate their donations.

The 2008 survey by the Bank of American indicates half of high-net-worth givers would give basically the same even if the tax deduction were zero.

But if there were really a loss in charitable giving, discernible from the reduced incomes even the wealthy have suffered in the recession, the nonprofit sector would have to answer this question: Is the loss of 1.3 percent of charitable giving a price the nonprofit sector is willing to pay to help finance comprehensive health care reform?

It is worth a debate based on the facts.

Rick Cohen is national correspondent for The Nonprofit Quarterly.

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