Obama Defends Push to Cut Tax Deductions for Charitable Gifts

March 26, 2009, The Washington Post — President Obama defends his proposal to cut the tax deductions that wealthy Americans can claim for their charitable donations by arguing that the shift would not have an adverse effect on giving, but two independent analyses concluded that the proposal could result in a drop of as much as $3.87 billion for the already reeling nonprofit sector.

In his prime-time news conference Tuesday, Obama pushed back against bipartisan criticism of his plan, which is included in his budget blueprint, by saying that "there's very little evidence that this has a significant impact on charitable giving."

But a report from the Center on Budget and Policy Priorities said total charitable contributions would decline by about 1.3 percent, while the Center on Philanthropy at Indiana University calculated that overall giving would drop by 2.1 percent. The highest-income households would decrease their giving by 4.8 percent, or $3.87 billion, the latter group found.

"Charities and the public need to understand that in the current economic environment, which is creating difficulty for some nonprofits and their constituents already, this public policy change is likely to have an additional negative effect," said Patrick M. Rooney, the philanthropy center's interim executive director.

Under Obama's proposal, the tax deduction for those with incomes over $250,000 -- which is now 35 cents for each dollar donated -- would be limited to 28 percent. That would return the rate to where it was during President Ronald Reagan's administration.

Obama said the change would help equalize the tax break for those donating to charity. "When I give $100, I'd get the same amount of deduction as when some -- a bus driver who's making $50,000 a year, or $40,000 a year -- give that same $100," he said, adding that the provision would affect about 1 percent of Americans.

Administration officials said the proposal should be considered within the totality of the budget. The policy change would help finance efforts to reform the nation's health-care system, said Kenneth Baer, a spokesman for budget director Peter Orszag.

"Generally what keeps people giving is economic growth, increasing incomes and increasing prosperity, and in totality that's what this budget would do," Baer said. "This change is going to fund health-care reform, and constraining those costs is the single biggest thing we can do to put our country on a sustainable fiscal path and get this country going."

Americans donate about $300 billion a year to nonprofit organizations, according to Giving USA, which conducts annual surveys. But in the current economic climate, many agencies are experiencing a drop in revenue. Many foundations are giving less grant money to nonprofits because their endowments have declined along with the stock market, while local and state governments have also cut back their funding.

Diana Aviv, president of Independent Sector, a national coalition of charities, said any decrease in charitable giving caused by Obama's proposal, no matter how small, would be "seen as a stake in the heart."

"With all other means of income down, the idea that there will be another potential cut to the income of those nonprofit organizations feels catastrophic," Aviv said. "It is utterly unacceptable."

In Congress, members of both parties have spoken out against Obama's proposal since it was introduced last month. House Majority Leader Steny H. Hoyer (D-Md.), in an interview on MSNBC, said: "That's going to be controversial. And, obviously, charitable institutions will be -- have great concern. Clearly, one of their greatest concerns will be very, very large-income donors who make very substantial contributions to very worthwhile enterprises."

House Minority Leader John A. Boehner (R-Ohio) said in a statement yesterday that limiting charitable tax deductions to 28 percent "is absolutely the wrong thing to do. The administration should reverse course on this reckless policy that will hurt too many universities, churches and other charitable organizations."

In a move to create a new incentive for charitable giving, Democratic Sens. Charles E. Schumer (N.Y.), Carl M. Levin (Mich.) and Debbie Stabenow (Mich.) said yesterday that they have introduced legislation that would simplify the tax code to spur private foundations to give more money to charities. The bill would replace the current two-tiered system for taxing foundations on their investment income with a single tax rate, in part because lawmakers say the current system punishes foundations for years in which they give away more than usual.

Nonprofits such as universities and arts institutions that rely heavily on large donations from wealthy individuals are more likely to be affected by the administration's proposal than are food banks, shelters and other social service groups that raise money in smaller amounts.

Dean A. Zerbe, managing director of Alliant Group and a former senior tax counsel to the Senate Finance Committee who closely tracks the nonprofit sector, said he has no doubt that Obama's proposal would change wealthy donors' behavior.

"Of course it's going to affect behavior," he said. "The charities recognize that. Everyone does. . . . People just don't have their feet on their ground if they're not recognizing that reality."

Still, Obama argued that the deduction is not the primary reason people donate to charities and that his proposal would not deter giving.

"Now, if it's really a charitable contribution, I'm assuming that that shouldn't be a determining factor as to whether you're giving that $100 to the homeless shelter down the street," he said.