Rich Donors May Be Undeterred by Tax Caps on Charitable Gifts

March 4, 2009, Bloomberg — House Republican Leader John Boehner calls President Barack Obama’s proposal to limit high earners’ charitable tax deductions a “sharp blow to charities at a time when they are hurting during the economic downturn.”

Not necessarily, say tax and philanthropy experts. They say altruistic or religious motives outweigh tax-shelter considerations among such donors, and cite previous limitations placed on deductions for high earners that they say haven’t hurt donations.

The concern for nonprofit groups “is real, but it’s not absolute,” said Clinton Stretch, a principal in the Washington office of Deloitte & Touche LLP, where he advises clients on the federal budget and tax issues. “There are multiple ways people go about giving, and multiple reasons people go about deciding to do it.”

The budget plan Obama presented last week aims to raise $318 billion in revenue over the next decade by reducing the tax savings for top-earners’ itemized deductions -- including those for charitable donations -- by 30 percent. Most taxpayers who make charitable contributions wouldn’t be affected, though the wealthiest would get less of a tax benefit for their gifts.

Independent Sector, a Washington-based coalition of 600 nonprofit groups that opposes the measure, said it would be a further “disincentive” to giving in challenging economic times.

Church Donations
The proposal has drawn fire from Boehner and other Republicans for the effect it would have on religious donations. The measure would damp giving to the “faith-based organizations and groups” that “are the backbone of our communities,” Representative Roy Blunt, a Missouri Republican, said in a letter to House Speaker Nancy Pelosi on Feb. 27.

The White House has played down the potential impact, saying high-income donors still get a generous deduction.

“What drives charitable contributions is overall economic growth,” White House budget Director Peter Orszag told reporters Feb. 26. “It’s not done for a tax incentive but rather out of benevolence or some other related desire.”

Melissa Berman, president and chief executive of Rockefeller Philanthropy Advisers, which counsels individuals and corporations on giving away money, said tax savings typically rank far below the imperative to give back to the community or a sense of responsibility in surveys examining the motivations of wealthy donors.

Giving More
While she said Obama’s proposal may send a bad message at a time when people are adjusting their philanthropic habits to the recession, some donors may be compelled to give more out of sympathy for those who are struggling.

“We have no real precedent to know how people’s behavior may change,” she said.

Stretch also said the concerns may be overblown. Churches in particular aren’t likely to suffer because many of their donors will continue to tithe 10 percent of their income and aren’t motivated to give by tax savings. Tens of millions of other people also donate to charities including churches without being able to deduct their contributions.

In addition, he said many households at the lower end of the top brackets already effectively have the value of their deductions reduced to 26 percent or 28 percent by the alternative minimum tax, which was designed to limit the use of deductions and exemptions by the wealthy.

Minimum Tax
Between 1990 and 2001, a period when the minimum tax was increasingly capping deductions for six-figure income households, deductions for charitable giving grew at an annual rate of about 8.4 percent, according to a study by the Internal Revenue Service.

Charitable donations hit a record in 2007, according to the Giving USA Foundation, a research organization in Glenview, Illinois. The group said American individuals donate $200 billion annually. IRS statistics show about 3.6 million U.S. households with adjusted gross incomes of more than $200,000 deducted about $87.8 billion in charitable gifts in 2006, the last year for which data was available. As many as 84 million in the U.S. also may donate without claiming tax deductions, according to the Independent Sector.

Robert Greenstein, executive director of the Center on Budget and Policy Priorities, a Washington research group that usually sides with Democrats on economic policy, said the deduction cap merely reinstates limits former President Ronald Reagan signed into law in 1986. He cautioned, however, that tax rates were lower then, too.

Reagan Era
“One can look back to the period of the late ‘80s and find that whether it was home purchases, charitable contributions or the like they did not collapse when the incentive at the top of the income scale was 28 percent,” he said.

Obama, 47, proposed limiting the value of itemized tax deductions to 28 percent for the approximately 2.6 million U.S. households that fall into the top two income tax brackets, which would be 36 percent and 39.6 percent beginning in 2011 under his budget.

In 2008, the second-highest tax bracket kicked in at taxable income of $164,550 for single taxpayers and $200,300 for married couples. The top bracket last year was triggered at $357,700 for both groups; by 2011, both figures will be higher as they are adjusted for inflation annually.

Under Obama’s proposal, a taxpayer in the top bracket who donates $1,000 to charity would get a tax savings of $280 instead of $396 without the change. A taxpayer in the second- highest bracket would lose $80 in tax savings. The proposal would also limit tax savings for other write-offs including mortgage interest, state and local taxes paid, and medical expenses, among other itemized deductions.

One Percent Reduction
Jon Bakija, an economics professor at Williams College in Williamstown, Massachusetts, and Treasury Department economist Bradley Heim recently estimated that top earners reduce their donations by between 0.5 percent and 1 percent for every percentage-point increase in giving costs.

That means charitable giving may be reduced by between 10 percent and 20 percent under Obama’s proposal, Bakija said in an interview.

“Given the size of the change we’re talking about, it’s a modest effect,” Bakija said.