Nonprofits Fear Tax Limit On Charitable Deductions

In its ongoing efforts to raise the debt ceiling before the Aug. 2 deadline, the Obama administration has gone back to an idea it had already proposed twice before—that of limiting the tax deduction for charitable donations. The suggestion has alarmed several Jewish nonprofit groups and catalyzed them to lobby congressional leaders against adopting such a policy.

Kathy E. Manning, chair of the board of trustees of the Jewish Federations of North America, last week made an impassioned plea before the Senate Democratic Steering Committee, a group of 20 senators that included Majority Leader Harry Reid (D-Nev.) and Charles E. Schumer (D-N.Y.), to leave the charitable deduction alone. Manning, along with other Jewish leaders, had been invited to share her opinions with the committee regarding potential funding cuts to government programs.

As he did shortly after coming into office in 2009 and again last December, President Barack Obama recently proposed limiting itemized charitable deductions for families earning above $250,000. The proposal recommends lowering the top rate for deductions from 35 percent to 28 percent, which would mean that a $10,000 donation would net a tax refund of $2,800 instead of $3,500, saving the government up to $300 million over the next 10 years. Obama said that currently these deductions are “loopholes” in the tax code benefiting the wealthy.

Jeffery Solomon, the president of the Andrea and Charles Bronfman Philanthropies, said Obama is wrong to characterize the deduction that way.

“The benefits to society of the tax deduction are far, far greater than the benefits to the individual receiving that deduction,” Solomon said.

Solomon stressed that the services provided by Bronfman Philanthropies would not be affected because the Bronfmans originally established the fund with a $125 million grant, and the foundation does not solicit funds from the public. However, Solomon said that if deductions are limited, it could prevent other private foundations from being established, negatively impacting a wide range of organizations from “hospitals to cultural institutions, from Jewish educational programs to childcare.”

Despite the tax savings for the government, the nonprofit community says that limiting the deduction will cost charities a fortune. A 2009 study by the Indiana University Center on Philanthropy estimated that a similar proposal would cause a 4.6 percent reduction in donations by individuals in the top tax bracket, resulting in $4.9 billion in losses for all charities.

“Although we have hundreds of thousands of donors, we do receive a large portion of our contributions from higher income people, as probably most charities do,” according to Steven Woolf, senior tax policy counsel of the Jewish Federations of North America.

Woolf said that JFNA operates in a 90-10 environment; that is, it receives more than 90 percent of its total funding from less than 10 percent of its donors. “We certainly believe in the democracy of the annual campaign and the value of $18 donors and $36 donors, but we really also count on large donors to make large gifts. For most federations, that is where the bulk of the money comes from.”

The President believes that wealthy Americans should make the most sacrifices during this period of economic turmoil. “He believes that high income taxpayers ought to bear more burden than they do right now,” according to Clinton Stretch, a managing principal for tax policy in the Washington, D.C. office of Deloitte.

Of course, no one knows for certain whether high-end individuals will curb their donations simply because the value of their deductions would be lessened.

“I don’t run around saying to my donors, ‘and how much does the fact that you get a tax deduction for this $18 or this $18,000 or $180,000, how much do you count on your tax deduction?’” said Ruth W. Messinger, president of the American Jewish World Service. “I assume lots of people would go on being charitable because it’s their instinct, they think it’s their obligation.

Though nonprofits fear the effects of such a proposal, there is some debate as to the likelihood that it could be passed, especially with lobbyists from nonprofit groups in the ears of congressional leaders. Stretch called the chances of limiting charitable deductions being included in any deal to raise the debt ceiling “slim to none.” However, he thinks that it will be addressed again as early as 2013 if there is a discussion on fundamental tax reform.

But Stacy Palmer, editor of the Chronicle of Philanthropy, a publication that focuses on the nonprofit world, said that she believes Obama himself has fixed on the idea. Though it still seems unlikely, “there’s going to be pressure to save money in various places. So it may not happen, but this is the closest time we’ve seen it to happening,” she said. “The deficit problems are so severe that it’s more possible than it ever has been before.”

Leaders of nonprofit groups are working their connections on Capitol Hill to get the proposal off the table.

“There is an active coalition in Washington of major national charitable groups that are opposing this proposed limitation,” said Woolf. “We think that we need to speak out forcefully against this. We’ve been encouraged that were not alone in this fight and that large national charities like the United Way, like the American Red Cross and other religious groups also joined us.”

Still, the mere fact that limiting deductions is being discussed strikes Jewish leaders as worrisome. Solomon called it “the perfect storm.”

“You have government funding being cut back significantly, and for many of the programs we’re talking about, government funding is a core part of their revenue,” he said.

Messinger said that organizations are lobbying against making cuts to these programs “because we think it’s the job of the government, but partly because otherwise people are going to assume that we can pick up the pieces, and we don’t have the resources to do that now.”

Gabe Kahn is a local reporter.