President Obama’s Proposed Charitable Deduction Cap Rides Again

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At some point, the game of budgetary charades has to stop. President Obama’s proposed budget for the 2013 fiscal year contains the proposed cap on charitable deductions—in fact, all itemized deductions—of 28 percent that many had presumed the White House eschewed for this budget year. In fact, a White House representative had previously told NPQ on background that no changes to the charitable tax deduction were planned regarding the President’s proposal to raise taxes for millionaires, which would have precluded the idea of reviving the proposed charitable deduction cap.

Do nonprofits and charitable donors have something to worry about with this proposal? It’s easy to say “no way,” that it’s going nowhere, but surprises do happen. Here, briefly, are the issues facing the president, the nonprofit sector, and charitable donors:

Contradictory Messages

While broadly hinting that there would be no movement on the charitable deduction this year, the White House also put out a proposal for “the Buffett rule,” under which everyone earning at least $1 million a year would pay an effective tax rate of 30 percent. By any mathematical logic, that would cause mortal distress to the charitable deduction for millionaires and billionaires. But the president’s proposal also said that the rule would be implemented in a way so as not to disadvantage taxpayers making large charitable deductions.

The juxtaposition of the two proposals looks a little awkward for the White House given that the charitable deduction cap would apply to individuals with incomes of $200,000 and families of $250,000 while holding millionaires and billionaires harmless under the Buffett rule. Bad political optics. Even if the 28 percent cap and the Buffett rule can somehow coexist, they sound inconsistent and contradictory to the public and to the nonprofit sector.

Making the Rich Pay—but Not for Helping the Poor

One of the mainstays of President Obama’s campaign is a “make the rich pay” message which contrasts with his Republican opponents’ hardline stance against new taxes on the rich. In the past, the 28 percent cap on charitable deductions was meant to be one stratagem in paying for some aspects of health care reform or, more recently, the president’s job creation bill. If the extra revenue from a reduced charitable incentive could be earmarked to sustain programs that help the nation’s population that continues to suffer the ravages of the recession, that might—and arguably should—make it palatable to many charities (though that linkage failed to convince charities the first three times the president proposed it). However, for FY2013, the impetus is for deficit reduction.  Poll after poll shows the wealthy are more concerned about deficits than unemployment, roughly the reverse attitude of the middle and working classes. With the ability to earmark the charitable deduction savings for social programs illusory, is this fundamentally a ploy to get the support of the one percent for a tax increase that will address the issue they fret about the most?

Nonprofit Sector Priorities

The charitable deduction cap proposal still forces the nonprofit sector and the foundation sector to address their priorities toward the American people. Is it enough for the nonprofit sector to talk about charitable purpose as a response to the needs of the nation’s millions of unemployed and underemployed? Is it possible that some foundation sector leadership that virulently opposes the president’s charitable deduction proposal is no more supportive of ending the Bush tax cuts (that Obama extended, by the way), preferring a society of selective noblesse oblige?

The debate around limiting the amount of the charitable deduction is feared as a window that could open up debate as to the content of the charitable deduction. This is especially true as statistics emerge about a one percent in the charitable sector, too. For instance, a Stanford University fundraising campaign recently crushed previous university fundraising records by $2 billion. This is just one of several stories about the affluence of big, wealthy nonprofits that get big moneys from superwealthy donors. While the charitable deduction doesn’t currently differentiate, such organizations dwarf the bulk of nonprofits, which are stoically trying to survive the combination of losing charitable and philanthropic grants along with the tanking of state and federal grants.

The president’s budget proposal may be mostly campaign fodder, offering tax-the-rich tidbits such as raising the top tax rate on dividend income to 39.6 percent and essentially removing dividend income from the 15 percent capital gains treatment. The specific interests that might be on the losing side, even if minimally, such as homeowners (tied to the other politically contentious part of the president’s deduction proposal, capping the mortgage interest deduction), dividend earners and charities, are likely to behave as economist Henry Aaron predicts when facing “tax reform:” “Whenever you try to take money away from somebody, they will fight harder to keep it than will those who stand to gain.”

Nonetheless, the president’s proposals are not comprehensive tax reform, which won’t even be addressed in a significant way until after the November elections. As in past years, nonprofits, charitable donors, and others will likely organize to nip these proposals in the bud. But that doesn’t alleviate the nonprofit sector of its own obligation to consider its societal function in addressing the nation’s inequitable distribution of wealth and power—as calcified in the tax code.

  • Mike Stone

    I would like to hear from someone from the United Way. At a local level, I have worked with several who are trying to move toward impact funding, at the urging of UW Worldwide, and are struggling. The “backlash” phenomenon is something I was not familiar with.

  • Laine Seaton

    Thank you Kathi for this article. Welcome to my world. I run a statewide nonprofit in AZ, much like EarthShare, comprised of 28 environmental & conservation groups.

    I have found it extremely difficult to grow and increase our impact because of the United Way’s dominance here. Despite Arizona’s touting of green/sustainability and Corporate Social Responsibility, we’re met with intense resistance to even the idea of adding us to the list for employee giving choices.

    In 11 years, we are still in only 27 workplace giving campaigns – while our local United Way is in nearly 900 campaigns, bringing in over $50M annually. It’s fiercely competitive and does not at all reflect the spirit of philanthropy. People should be allowed to give to what they want.