If Nonprofits Want to Defend the Charitable Tax Deduction, Why Don’t They Sever It from the Mortgage Interest Deduction

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November 20, 2011; Source: Delaware OnlineEven as the deficit-cutting supercommittee goes down the tubes, the leadership of the nonprofit sector is engaged in a campaign to protect the charitable tax deduction from proposals that might cap its maximum deductibility to the 28 percent tax level from the current 35 percent (as proposed by President Obama). While some people are raising important questions about what a change in the deduction might do to the giving of very affluent Americans, some of the arguments are a little thin.

For example, in this op-ed penned by five collaborating authors, including Michelle Taylor, president and CEO of the United Way of Delaware, and William Wood, executive director of the Delaware Business Roundtable, the authors raise the concern that the “innovative partnership” between taxpayers and charities might be jeopardized by changes in the charitable deduction affecting “the most affluent donors taxpayers [who] can claim an itemized deduction.” But to suggest, as they do, that the President’s proposal “targets” donors who give $1,000 to $10,000 annually to the United Way is silly and not believable. They do damage to their argument by trying to make regular middle class donors think that they are the targets of the President’s proposal (which affects families earning more than $250,000 a year and individuals more than $200,000 a year). It’s just like when Republicans say that middle class taxpayers will be hurt when the Bush tax cuts expire.

As everyone who has followed this issue knows, the President’s 28 percent cap proposal isn’t aimed at charitable deductions exclusively but at all itemized deductions, including the mortgage interest tax deduction and the deduction for state and local taxes. Those are among the most regressive taxes in U.S. tax policy. If there is a societal benefit to the charitable deduction that goes to the very affluent, one could argue that it is worth protecting at the 35 percent level. Why not then call for separating the charitable deduction from the mortgage interest and state/local tax deductions, both of which are much larger in their budget impacts and terribly regressive? What prevents the nonprofit sector from calling a spade a spade—or a regressive element of the tax code for what it is?

This has a similar feel to the estate tax debate, where, for a very long time, nonprofit leadership organizations were catatonic at the thought of coming out in favor of the estate tax because their wealthiest donors wanted it gone. Is that what is going on here? Are nonprofits fearful of ticking off their donors who are attached to the mortgage interest deduction which deserves at a minimum to be capped if not reduced further? If nonprofits think that the charitable deduction is in danger—which we at NPQ don’t think is the case given the demise of the supercommittee—they would call for severing it from its tax deduction companions that have much less to contribute positively to American society and have much larger negative impacts on the federal budget.—Rick Cohen