Will the fiscal grinch ruin US charities’ holiday season?

December 14, 2012
Obsession
Fiscal Cliff
December 14, 2012

Charitable giving is on people’s minds during the holiday season. But charities in the US are up in arms about a potential plan to avoid America’s automatic austerity trigger (the fiscal cliff) on Jan 1. by limiting tax deductions—including the break given to people who donate to non-profit organizations. Does that mean that the fiscal cliff could turn into a fiscal grinch, intent on ruining holiday cheer?

Reducing the size of the deduction, a Democratic proposal, has non-profits up in arms:

Since Obama first proposed to lower the deduction in 2009, more than 60 nonprofit groups have spent at least $21 million lobbying Congress and the White House to preserve it, lobbying records show. Although nonprofit officials characterize the effort as grassroots, including a recent “Lobby Day” during which the groups’ staffers donated their time and descended on Capitol Hill, at least 25 organizations have hired Washington-area lobbying firms.

And policy experts worried that giving could be severely hit if deductions as a whole are capped, as Republicans have proposed, says James Stewart in the New York Times:

“No one wants to say, Let’s kill the charitable deduction, but across-the-board limits would hit charitable deduction the hardest,” Eugene Steuerle, co-director of the Tax Policy Center at the Urban Institute and Brookings Institution, told me this week. “And it’s a big mistake to think that only the wealthy would be affected. Many lower- and middle-income people go to churches, museums, hospitals and colleges. They’re the ones who are going to be hurt.”

But America’s baroque tax code still needs to be less complex and generate more revenue. Is there a middle ground? The Tax Policy Center’s Len Berman thinks so. His research shows that most givers don’t actually take advantage of the break. Only 30% of American tax payers itemize their deductions, and the latest economic research suggests that the effect of removing the deduction would be small. Still, its impact would be focused on the wealthier givers.

He suggests a third way between capping all deductions or limiting their effects: Create a deduction that would apply only to gifts that exceed 1.7% of your taxable income. This would encourage big donors who actually care about deductions to keep donating, and, he estimates, “could increase tax revenues by about $10 billion a year, without reducing charitable contributions at all.”

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