By Sean Belk - Staff Writer
August 14, 2012 - In the past few years, President Barack Obama has attempted to lower tax deductions that individuals and families of the highest income tax brackets can receive for making hefty charitable contributions. The Obama administration has crafted the proposal more recently as a way to broaden the tax base, reduce the federal deficit and stimulate job growth, according to tax policy experts.
But so far this year the proposal hasn’t gained any serious traction in Congress, and most experts said the plan won’t likely come back for discussion until after the presidential election or at least until the U.S. Senate returns from recess in September.
But nonprofits and philanthropy advocates still fear the writing might be on the wall come next year.
The intent of the charitable deduction is to provide an incentive for wealthy individuals to make large contributions to charities – similar to the mortgage tax deduction that encourages homeownership. But during the economic downturn, inequalities in the tax code have come to the forefront, while the government looks to generate revenue, cut unnecessary exclusions and fix budget shortfalls.
In February, the president’s proposed fiscal year 2013 budget included a provision to cap the value of all itemized deductions at 28 percent. The proposal would essentially increase taxes on the top 2 percent of income-earners or those in the 33 percent and 35 percent tax brackets (individuals with incomes over $200,000 or families with annual incomes over $250,000).
Part of the logic behind the proposal is based on the fact that, under the current tax code, if a middle-class family donates one dollar to a charity, it gets a 15-cent tax deduction, while the wealthiest individuals making the same donation get a tax break of more than twice that amount, according to the White House website. The Obama administration has estimated that the proposed limitation on deductions would reduce the federal deficit by $584 billion over 10 years.
For many in the philanthropy and nonprofit world, however, the debate over tax reform has brought into question whether reducing the current charitable deduction for high-income earners would, in fact, reduce charitable giving at a time when funding for nonprofits is stretched thin.
“Everyone acknowledges that the tax code is out of whack . . . but the questions are: what is clutter, what is a loophole and what is legitimate tax policy that’s vital for a society?” said David M. Thompson, vice president of public policy for the National Council of Nonprofits. “We feel the charitable deduction is vital to society. It’s unique in terms of all the itemized deductions and all the tax provisions and credits that Congress has enacted over the last 20 to 30 years.”
The president’s proposal has come alongside the Buffett Rule, a proposal that would force individuals who make at least $1 million a year to pay a minimum 30 percent tax rate. In April, the senate voted down the rule, which some philanthropy advocates said would have impacted charitable giving, even though it exempted charitable deductions.
On August 2, the senate finance committee approved a trimmed down version of the Family and Business Tax Cut Certainty Act of 2012, legislation that extends various expired tax breaks known as “extenders.” If Congress eventually passes the extenders bill, the legislation would reinstate some tax provisions, such as the IRA charitable rollover, and extend others, such as enhanced deductions for food inventory contributions.
Dave Koenig, vice president of tax and profitability for the National Restaurant Association, said the extenders bill would go a long way in helping local food banks and charities by allowing traditional and non-traditional food corporations to deduct food donations at “fair market value,” a provision that expired at the end of 2011. But, he said it’s still unclear if the bill will get passed by the end of this year.
While the president’s proposal to cap itemized deductions has yet to resurface, tax experts said the charitable deduction could still be limited in January 2013 under the Pease Amendment, unless legislative action is taken. Under the amendment, charitable deductions would return to being “reduced by 3 percent of the amount by which adjusted gross income, or AGI, exceeds a specified threshold or up to a maximum reduction of 80 percent of itemized deductions” – whichever is less.
Still, some tax experts said altering the charitable deduction shouldn’t make much of an impact on contributions nonprofits receive.
Blake Christian, partner of Long Beach-based Holthouse Carlin & Van Trigt, said lowering the cap on charitable deductions to 28 percent wouldn’t necessarily change people’s behaviors, since most of the taxpayers who itemize are subject to other deduction-cutting provisions, such as the alternative minimum tax.
“If you did away with the charitable deduction all together, you’re going to have some significant slowdown in charity, but dropping it [from 35 percent to 28 percent] is probably not going to change people’s behaviors dramatically,” he said. “I also don’t see that as being real popular in Congress either . . . There are enough ways they can bump up the tax rates on the rich and still incentivize them.”
There are other proposals to change the charitable giving incentive, including various plans to create a “tax credit” (in some cases the credit would be payable to nonprofits) instead of a deduction. According to the Alliance for Charitable Reform, The Tax Policy Center estimated in October 2011 that the president’s proposal alone, however, would “reduce giving by up to $5.6 billion each year.” The alliance also states that “while the donor receives some tax benefit for donations, the biggest benefit goes to the charity and those who are served . . . The president’s plan will hit those who rely on charities much more than it will hit the wealthy.”
The Council on Foundations states that limiting itemized deductions would impact just 3 percent of taxpayers, but the taxpayers still provide 36 percent of all charitable contributions. “Combined with the slow recovery from the recession and government funding cuts, even modest changes to the tax deduction could negatively affect charities,” the organization states.
An annual report on philanthropy by Giving USA Foundation released in June states that American individuals, bequests, corporations and foundations gave a total of $298.42 billion in charitable contributions last year, which was up about 4 percent over 2010 in current dollars and up .9 percent in inflation-adjusted dollars. But philanthropy experts said many charities face challenges in a still slow recovery.
In Los Angeles County, a 2012 report by UCLA’s Center for Civil Society calculated that about 20 percent of the approximately 600 nonprofits surveyed – most of which provided services to the poor – disbanded since the initial survey was taken in 2002.
James Ferris, director of the USC’s Center on Philanthropy and Public Policy, said the charitable deduction doesn’t necessarily spur people to contribute to a nonprofit organization, since most taxpayers don’t have to itemize deductions. But he said the tax break might impact the “magnitude” of how much a person in a high-income tax bracket may contribute.
“They’re going to give whether they get the tax break or not; what matters is how much more they give because of the tax break, which lowers the cost of giving,” he said. “It’s clear that it does provide an incentive . . . There is a responsiveness to the tax break amongst people who itemize.”
Big Gift Recipients
Some experts say the limit on the charitable deduction may impact large charities – such as universities, museums, hospitals and cultural institutions – the most. These larger nonprofit groups typically receive fewer grants than smaller government-subsidized charities and are the recipients of large gifts from taxpayers in the higher end of the income spectrum.
Tax write-offs for larger nonprofits, such as museums, however, have also become the subject of concern for the Internal Revenue Service, in some recent cases where “in-kind” contributions have to be valued, such as artwork or automobiles, Ferris said. Regardless, large gifts remain a huge revenue source for many large nonprofits.
The Aquarium of the Pacific, for instance, opened a new June Keyes Penguin Habitat this year that was funded primarily through a $1.2 million gift from an anonymous donor, said Nancy Weintraub, the Aquarium’s vice president of development. “Our donors typically give to support the Aquarium’s vision and mission driven programs,” she said. “We are watching this proposed legislation carefully and studying it to see if it may have any potential effects on our organization.”
She said approximately 25 percent of the Aquarium’s annual operating budget comes from private donations, corporate and foundation grants and special event revenue. Weintraub said, so far this year, the Aquarium has seen a more than 20 percent growth in donations over the previous year. Also, she said the Aquarium was recently awarded a $331,000 grant from NASA to create a multimedia exhibit-based program called “Our Instrumental Earth,” scheduled to debut in summer 2013.
Stuart Ashman, president and CEO of the Museum of Latin American Art, (MoLAA), said via e-mail that the museum continues to come up with new revenue streams since a million-dollar cash bequest left by the museum’s founder, Robert Gumbiner, only provides for about one-third of the museum’s needed funding for operations.
This fall, MoLAA opened two exhibitions by two major Latin American women artists – “Sociales: Debora Arango Arrives Today;” and “Lola Alvares Bravo” – which were funded through a special auction held as part of the museum’s annual gala last May. In an effort to become more accessible to the broader public, the museum received a “generous” grant from the Target Foundation to offer free admission and docent tours every Sunday, he said. “If the federal government is not going to support our museums, libraries and cultural institutions through the federal budget, then private individual donors, foundations and corporations should be encouraged rather than discouraged from filling the void left by a decrease in federal funding for the arts,” Ashman said.
Jim Normandin, president of the Long Beach Memorial Medical Center Foundation, said most contributions are driven by a donor’s passion for a cause and tax breaks are normally irrelevant to the decision to contribute. Through individual contributions, bond financing and other revenue sources, the longtime foundation provides financial assistance for technological advancements, patient programs, development and research at Memorial Medical Center, Miller Children’s Hospital and Community Hospital of Long Beach.
“I really think philanthropy is driven by the head and the heart coming together and saying, ‘you know what, this is the right thing to do . . . I need to help support whatever the cause is,” he said. “I think [donors are] more interested in seeing what impact a gift has rather than the impact of the tax incentives . . . But there is room for tax savings and tax advantages and it would be bothersome if our legislators chose to take it away either in whole or in part.”
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