The President’s proposal is simple: to reduce or cap the level of itemized deductions of all kinds at the 28 percent tax bracket level for taxpayers in the top 33 and 35 percent brackets. His purpose? According to the President’s budget director, Peter Orszag, the money from all of the reductions in itemizations by wealthy taxpayers would go into a “historic $634 billion reserve fund to fund health care reform”. In his words, “Reforming health care is essential to the long-term fiscal health of the country. Indeed, bending the curve on health costs is the single most important thing we can do to get our country back on a sustainable long-term fiscal path.”
The opposition to the proposal has been constructed in part on a cascade of myths and misinformation. Whether the Obama proposal is good or bad, it ought to be debated on the facts. And the sector should look at not only the impact on nonprofits, but the impact on society overall. What should be the nonprofit sector’s contribution to the nation’s solution to national health care reform? This article poses the other side of the issue for nonprofits to ponder.
Not Taking Aim at Charities and Charitable Giving
Some of the opposition to the tax proposal imagines that President Obama was taking aim at charities, pure and simple, to bear the burden of paying for health care reform.
Entirely untrue. President Obama proposed capping the charitable deduction and other itemizations as well, not just the charitable deduction. The biggest target in the proposal is actually the mortgage interest deduction, but the president’s budget proposal is to reduce the cost to the Treasury of all itemized deductions, all of them. For some very wealthy taxpayers, it means that a $10,000 deduction-for charitable donations or anything else-that would typically result in a reduction in tax liability of $3,500 (for someone in the 35 percent tax bracket) would be only $2,800 (as in the 28 percentage bracket). (Remember that in the Obama budget, the tax rates for the top two tiers are also slated to increase to 36 and 39.6 percent, basically the top tax rates of the Clinton era before the reductions in by the Bush Administration). In other words, at the 35 percent tax rate, when wealthy households get a $3,500 tax benefit on a $10,000 charitable deduction, middle income households only get $2,800 or less. Nonitemizers, they get zero.
Regardless of President Obama’s intended use of the saved revenues, the proposal fundamentally asks why Bill Gates, Warren Buffet, T. Boone Pickens, and Donald Trump deserve $3,500 tax breaks on their $10,000 gifts when the bulk of tax itemizers get only $2,800 deductions for the same money.One could see the attempt to reduce the gap in the value of itemized deductions–charitable and otherwise–as a step toward tax fairness.
The sum of all of the reduced deductions would contribute $318 billion in increased federal revenues over 10 years, roughly half of the President’s planned reserve fund to pay for health care reform, a cost estimated at around $1.3 trillion. As summarized by a headline in the New York Times, it is, “To Pay for Health Care, Obama Looks to Taxes on [the] Affluent”. In other words, the President is simply increasing the tax on the wealthy (by reducing the value of their itemized deduction) to pay for part of comprehensive health care reform.
This proposal is, by the way, exactly what the clear majority of all Americans support: 71 percent of people contacted in a professional poll conducted for the Kaiser Family Foundation supported increasing taxes on households with incomes over $250,000 to pay for health care reform.
Impacting Only a Small Proportion of Taxpayers-the Very Wealthy
Let’s be even clearer about who might be impacted: The tax proposal affects only taxpayers in the top two tax brackets. There are other wealthy people who don’t pay at the 33 or 35 percent levels, because they are automatically kicked in as Alternative Minimum Tax (AMT) payers at 28 percent. So the end result is only a little more than 1 percent of taxpayers are impacted by the reduction in the value of itemizations, or better put, in the increase in effective tax rates. Like charities, other beneficiaries of itemized deductions such as small businesses and real estate brokers are decrying the Obama proposal as savaging business investment and homebuying. In typically sober statistical reports, the Center for Budget and Policy Priorities calls these fears overblown given the minuscule number of taxpayers affected.
The Tax Policy Center (a collaboration of the Brookings Institution and the Urban Institute) suggests that the entirety of President Obama’s changes in itemized deductions have small effects on wealthy taxpayers. Even with the President’s proposed “fix” of the Alternative Minimum Tax which reduces the number of AMT payers from 19.6 to 18.6 million, the average increase in taxes is $46 for taxpayers between $100,000 to $200,000 in cash income, $792 for taxpayers between $200,000 and $500,000, $5,311 for between $500,000 and $1,000,000, and $25,482 for taxpayers above $1,000,000 in cash income. These are hardly crippling tax hikes on wealthy and very wealthy taxpayers, much less their charitable giving.
While we do not doubt that for some people, an increase in the cost of charitable giving (because of a decrease in its maximum tax deductibility) may have a dampening effect, we recall the frequent admonitions of the late Claude Rosenberg who founded the NewTithing Group that the affluent were much less charitably generous than they could be, failing to take maximum advantage of the tax code. His 2001 calculations were clearest on this score: Taxpayers below $100,000 in income on average were basically making the maximum charitable donations they could do given the tax code, their income, and their assets; taxpayers with AGIs between $500,000 and $1,000,000 could have donated another $16 billion without adverse tax consequences and those above $1,000,000 had another $98 billion available for charitable donations. For affluent charitable donors, given their combination of income and asset wealth, the constraint on charitable giving generally does not flow from the limitation of the federal tax deductibility.
Taking Money from Charities When Most Needed-Not True
Opponents have claimed that the President’s tax proposal would take money away from charities at a critical time when they need the dollars most. This was multiple misinformation: The reduction in the charitable deduction was not slated to take effect until 2011 at the earliest, and perhaps even later than that, as the administration is committed to not raising taxes during the recession including changing the deductibility of the charitable donations. There is plenty of evidence that the impact of the recession itself on charitable giving is has far more impact on levels of donations than the tax proposal, even if it were to have been enacted prior to 2011.
But would the potentially foregone charitable dollars that might disappear due to the change in the deductibility of itemizations have been those critical dollars going to recession-fighting nonprofits? The affected taxpayers would be maybe the 1.2 percent of taxpayers making charitable donations in the 33 and 35 percent tax brackets, and they are responsible for perhaps 1.3 percent of charitable giving. Who benefits from the giving of the top taxpayers? In the comments quoted in the mainstream press, those fretting the most were the fundraisers for the kinds of institutions–universities, museums, hospitals–accustomed to receiving very large gifts from very wealthy donors. The Chronicle of Philanthropy cited Bruce Flessner, a fund-raising expert from Minneapolis, that the tax “plan would probably have little impact on organizations that rely on large numbers of relatively modest gifts, (b)ut large institutions, particularly colleges and universities and academic medical centers that attract the biggest gifts, could be hit particularly hard if the plan moves forward,” a perspective affirmed by Lester Salamon of Johns Hopkins University who opined that the major impact would be on donations to the arts and higher education.
The receipient organizations in the most recent list of high-end charitable donations may be significant nonprofit entities, but do not look like organizations on the front lines of fighting the impact of this recession in poor communities. In the Center on Philanthropy’s 2008 report on million dollar donors, higher education (universities) got 68 percent of the gifts amounting to 29 percent of the total dollars; foundations got 2 percent of the donations, but 45 percent of the dollars. According to Ken McCrory of McCrory McDowell Downtown, 66 percent of people earning $1 million or more donate to large health care, education, and arts institutions compared to 7.5 percent of households earning less than $100,000 annually.
Charitable contributions account for only 12.3 percent of the nonprofit sector’s revenues, according to the Urban Institute’s The Nonprofit Sector in Brief, drawing on data from The Nonprofit Almanac 2008. One-third of these individual charitable donations go to religious institutions (relying on charitable donations for 95 percent of their revenues), of which a very small portion is spent on anything other than sacerdotal purposes. But there is no question that in the U.S., charitable giving for the causes closest to the needs of disadvantaged and disenfranchised American households comes from working class and lower income donors, who consistently reveal themselves as the nation’s most generous in terms of giving as a percentage of income or assets. A 2001 study of charitable donors in the U.K., titled The Widow’s Might: How Charities Depend on the Poor, attested to the generosity of lower income and working class donors to poverty-focused charities, a conclusion we think is equally applicable to donor behavior in the U.S. Just compare the charitable distribution priorities of high end donors to the workers making payroll deduction contributions to charities through the United Way, America’s Charities, and other entities, predominantly focused on the basic needs and emergency services to populations that are victims of the recession.
The Cost of the Uninsured to the Nation and to Nonprofits
Some opponents suggested that they might have been able to accept or even endorse a reduction in the charitable tax deduction if they could be assured–guaranteed–that the moneys that would flow into federal coffers would be dedicated to functions other than the Iraq or Afghanistan invasions or the military or other noxious expenditures. But that’s exactly what President Obama did: he chose to dedicate the revenues that would flow to the federal government to help pay for the cost of comprehensive health care reform. According to the President’s budget director, the money from all of the reductions in itemizations, not just charitable donations, by the super wealthy would go into a reserve fund to pay for part of health care reform.
Obama’s tax proposal was to help pay for comprehensive health care, for insurance for America’s 45 million uninsured nonelderly persons (a report from the Henry J. Kaiser Family Foundation suggested that in 2008 some 77 million people were likely to have spent some part of that year without health insurance, not the generally accepted 45 million figure, but we will stick with the 45 million figure). Is federal funding for health insurance a government expenditure in the nonprofit sector’s interest? Whether or not one believes that the reduction of itemizations is a good thing to do, there is no question that federal funding for health insurance or comprehensive health care reform is clearly something that benefits the nonprofit sector indirectly and directly as well as society as a whole.
Where do the uninsured go for health care when they don’t have medical insurance? They sit in hospital emergency rooms and in community health clinics hoping for free care, else they go without. Due to the inadequate health insurance that some people get, with costly co-pays and prescriptions, even people who have medical insurance sometimes–or at some income levels, frequently–skip needed treatments.
Who pays for uncompensated health care? According to the Kaiser Family Foundation again, federal and state governments pick up about 75 percent of the cost of uncompensated care; “private sources of charity care” cover the remainder. The cost of uninsured health care was, in 2008, approximately $176 billion, which is a number predicated on what the uninsured actually consume in uncompensated health care, not what they should have or would have consumed had they had decent and reliable coverage (probably around $300 billion).
Assume for the moment that we have a recession-fighting nonprofit sector dedicated to serving the multiplicity of needs of the poor and disadvantaged. The 45 million uninsured nonelderly are probably disproportionately overrepresented in target communities being served by the nonprofit sector. As any good nonprofit knows, the health care coverage issues faced by poor families are generally linked to other issues addresed by nonprofit service organizations–jobs, housing, child care, and more. Eight out of ten of the uninsured are from working families with incomes generally below 200 percent of the family poverty level of $42,400 (as of 2007). At that low household income or salary level, they might well be the often underpaid employees of nonprofits themselves–and in some cases, they are.
Health Insurance for Nonprofit Workers–Needed
A recent Boston Foundation study of nonprofit employee benefits in Massachusetts found that just over half of nonprofits with budgets less than $250,000, described as “community-based” nonprofits, offered health insurance to their employees. Oddly, by type of nonprofits, housing and community capacity were most likely to offer health insurance, “philanthropy nonprofits” (category “T” in the NTEE classification) least likely. A 2004 study of Arizona nonprofits was similar, with only 50 percent of nonprofits below $350,000 in revenues offering health insurance. In 2008, according to a report from the Minnesota Council of Nonprofits, 54 percent of surveyed nonprofits with revenues between $100,000 and $199,999 and 39 percent with revenues from $200,000 to $499,999 did not offer health insurance. A 2003 report found that almost half of all of surveyed nonprofits in Kansas, regardless of size, offered health insurance. Don’t even bother to ask about dental coverage even for employees of small or large nonprofits regardless of their location, significant proportions are not covered, and many dental policies do not cover very much.
Even for nonprofits offering health insurance, the costs are skyrocketing. A Pittsburgh study of nonprofits revealed an average increase in employer premiums of 34 percent in 2004 alone. The Connecticut Association of Nonprofits characterizes the increase for its members’ insurance costs as “astronomical”. According to the Kaiser Family Foundation once more, average family health insurance premiums in employer-provided policies rose 27 percent between 2004 and 2008 and 119 percent between 1999 and 2008. There’s no reason why nonprofits would be immune from the expensive and inadequate policies available to employers of all types under this nation’s current health care system.
Nonprofit Sector Reactions
In a teleconference held by Arabella Philanthropic Investment Advisors, cosponsored by the Council on Foundations, the Association of Small Foundations, and the Forum of Regional Associations of Grantmakers, Tim Walter of the Association of Small Foundations said that he didn’t know “of any philanthropic organization that actually supports the Obama change, and [he had] polled a few of them” before the teleconference. On the same teleconference, the head of the Council on Foundations indicated that the Council, no fan of the proposals either, had “been very careful to communicate to our colleagues and friends within the Administration and certainly to members of Congress on Capitol Hill our concerns over the impact of the individualized cap at 28 percent on philanthropy…at a time when society needs [additional charitable money]… but we’ve also been very strategic…not to engage this debate or discussion within the national press [because] we just don’t think it is appropriate at this point in time because there are so many pluses to this Administration than there are to this one sort of negative where we just happen to have a disagreement about how to best fund health care reform.”
The lack of any evidence of support, at least from charitable sector trade associations and nonprofit and philanthropic infrastructure or leadership networks, may well be accurate. Like the Council on Foundations, Independent Sector has come out against the tax proposal, though issuing an agonized statement about the “Solomon’s choice” that confronted charities. In one article, Independent Sector’s Diana Aviv was quoted as saying that any decrease in charitable giving caused by the tax proposal, no matter how small, would be “seen as a stake in the heart.” In another interview, she opined that “there are other options that should be looked at for funding health care reform,” concluding from her discussions on Capitol Hill that “(m)ost key members of Congress think it’s a bad idea…[and the tax proposal] doesn’t have much shelf life.”
Surprisingly, some venues which might have been expected to say something positive or supportive of the proposal are lacking published analysis and commentary. There is nothing on the website of Grantmakers in Health as a public statement, issue brief, or anything that examines the pros and cons of reducing itemized deductions to help pay for comprehensive health care reform. Despite generally excellent publications and links on health, the website Grantmakers for Children Youth and Families is also short on commentary on this proposal. It should be noted that while President Obama put this idea into his FY2010 federal budget proposal, the notion of reducing the value of itemized deductions for the wealthy is not new, even in terms of using part of the revenue savings for health care reform.
With much more forthrightness to engage in the public debate with their concerns, the conservative side of philanthropy is speaking out on the Obama proposals. The Alliance for Charitable Reform issued a press release in March about the testimony of ACR board member Joanne Fiorino of the Triad Foundation opposing the tax proposal as “a step in the wrong direction.” ACR’s own statement decried the “chilling effect” on charitable donations that would accompany President Obama’s budget proposals. Conservative journalists have also weighed in: Peter Wehner in the National Review called the tax plan “an assault on authentic compassion”, charging that Obama actually wanted charitable giving to the poor to decline based on an ideological commitment to increase the size of government; Harvard University economist Martin Feldstein discovered the importance of charity and called the Obama proposal a mistake in a Washington Post op-ed; Republican senators and representatives such as Missouri’s Roy Blunt, Ohio’s John Boehner, South Dakota’s John Thune, and Nevada’s John Ensign promised charities they would do their utmost to kill the proposal.
While the major associations might have been cautious about opposing Obama’s plan publicly, the leaders of individual charities went to the press with concerns: The president of Western Kentucky University wrote in opposition to the plan, his letter citing on the floor of the Senate by Republican leader Mitch McConnell; Sandy Weill, chairman emeritus of Citigroup, wrote in Business Week about the importance of “giving back”, suggesting an increase in the upper tax rate and the charitable deduction to over 40 percent as an alternative to the Obama plan (even though Obama’s intended upper income tax rate would be over 39 percent); the Policy Director of the Union of Orthodox Jewish Congregations of America acknowledged that “health-care reform is critical, and it must be paid for, but not by placing the burden on America’s charities and those they serve”; the American Jewish Committee executive director David Harris wrote to Orszag saying that “(t)his proposal will have a devastating effect on nonprofits by removing a prime source of funding for our missions at a time when we are already grappling with severely reduced financial resources”; the president of Southern Wesleyan University in South Carolina, David Spittal, said that the tax plan “would hurt the school’s efforts to raise large sums of money” from very wealthy donors. The observations from charities in support of the tax proposal, such as from Simon Greer of the Jewish Fund for Justice and Joel Berg of the New York City Coalition Against Hunger, are hard to find amidst the cacophony of opposition.
Congress certainly heard the opposition, but the upfront comments of the conservatives and the behind the scenes pushback from mainstream foundations. Senate Finance Committee chair Max Baucus countered a Republican “sense of the Senate resolution” (from Thune, Bennett, and others) opposing the cap on charitable deductions with his own resolution that likewise signaled President Obama of the lack of support within his own party for the tax proposal. Key Democrats and Obama allies such as New York Congressman (and Ways and Means chairman) Charles Rangel (“I would never want to adversely affect anything that is charitable or good”) and New Jersey Senator Bob Menendez (“[this proposal] it is certainly one that I am having difficulties with”) raised concerns. Most news reports on the agreement reached by Congressional Democrats on the Obama budget (April 27-28) say that it “ignores” the President’s plan on itemized deductions, leaving the issue of financing insurance reform hanging.
The Democratic agreement included an endorse of the Pay-Go formula of new spending programs such as health care reform to be offset by either new taxes or spending cuts elsewhere or both. Budget director Orszag’s public statement on health care financing tracked the Pay-Go theory: “The bottom line is that health care reform must be deficit neutral in the short run and deficit reducing in the long term. We have to have scoreable savings in the short term to finance additional benefits or coverage. But we must do more than that. We have to move aggressively to change the rules of the game so that we slow the growth in long term costs. Many of these things may not have substantial short-term savings, but over the long term will contribute to more efficient arrangements in the health sector.” If Congressional Democrats have eschewed the reduction in itemizations, they will have to find some other financing mechanisms or else put health care reform far into the future.
President Obama and his allies have debated the issue on impact-on-charities terms, with Orszag and others pointing out that past reductions in the tax rate (and therefore in the value of deductions) have not resulted in lowered charitable giving, such as between 2002 and 2003 when the top rate was reduced from 38.6 to 35 percent. According to Orszag, during that time period, “individual charitable contributions rose, presumably because other factors were a more important influence on giving than the change in the income tax.” Others have cited studies of giving by the super wealthy, such as the recent report from the Bank of America, repeating the findings of early BOA studies of high net worth givers, that most of that top class of givers are so wealthy that tax considerations really are not a matter of concern to them in whether or even how much they donate (over half of surveyed donors say that their giving would not have changed if the charitable deduction were zero). Eli Broad of the Broad Foundation announced that the itemization change wouldn’t affect his charitable giving, since he had already donated way more than he can deduct. Orszag and the President himself have questioned why a rich person should get a tax benefit of $3,500 on a donation of $10,000 while a middle class working family would get a benefit of only $2,800 for the same donation.
But those arguments don’t address the real issue: Is the potential loss of a small portion of charitable donations, even if a “small portion” is measured in billions, perhaps $4 billion, maybe even $6 billion, depending on economists’ estimates and models, a price worth paying in order to help finance comprehensive health care reform? For nonprofits as a whole, the short term savings are clear, the long term benefits undeniable, the nonprofit sector itself is “net winner” from universal health coverage (according to CBPP’s Bob Greenstein on the Arabella teleconference). In the end, we all have to pay for health care reform. Every sector will have to give up something in order to help achieve comprehensive health care reform. Is the potential of less than 2 percent of reduced charitable donations worth the result of a new system of health care in the U.S.? It is worth a debate on the facts–and above board, not behind the scenes.