It was hardly a “profile in courage” moment for the leadership of the nonprofit sector this week at the Senate Finance Committee. The nation’s nonprofit leadership organizations trooped to Capitol Hill in Washington, D.C. to express their opposition to any changes in the income-tax deduction for charitable giving. They refused to budge one inch in the direction of President Obama’s call to cap the total value of income tax deductions that any one taxpayer can claim (including deductions for charitable donations, but also for state and local income taxes and home mortgage interest payments).

Painting dire warnings of a nonprofit catastrophe if the charitable deduction is at all tampered with, the nonprofit leaders performed a nearly note-perfect recital of the sector’s response to last year’s Senate Finance Committee call for tighter regulation and oversight of nonprofit organizations. The big nonprofits and the big donors all like to fret publicly about the impact of industry changes on the little nonprofits—the soup kitchens, the homeless shelters, the community arts programs. At these moments, there’s often a sudden blast of apparent concern about little community-based nonprofits, the small human service providers that do yeoman’s work on the front lines of America’s social problems with what is usually minuscule attention from super-wealthy donors.

Think about how much donors, foundations, and nonprofits spend nowadays to address the consequences of less-than-universal health care in the U.S. Strangely, that calculation wasn’t enough to convince the nonprofit sector’s leadership groups that giving up perhaps a smidgen of revenue by capping the charitable deduction would be outweighed by the charitable sector’s potential savings in healthcare costs. Now, President Obama would use the savings from capping the charitable deduction to help pay for his jobs bill, which has now been split up into its constituent parts. Imagine how much more charitable giving there would be to community-based groups if more people were employed and earning incomes enabling them to make donations. But none of these factors outweighed the determination of nonprofit leadership organizations to zealously protect the maximum tax deductibility for charitable donations by the nation’s economic upper tier.

Truth be told, the likelihood of a charitable deduction cap passing is pretty much nil right now. President Obama’s two previous proposals to limit deductions died without Congressional consideration, in part due to opposition from Democrats as well as Republicans. The scary idea that capping charitable deductions will hurt charities—regardless of how much or which charities—was apparently sufficient to scare off potential supporters in the President’s own camp. At the same time, Obama’s team did a lackluster job of selling the idea. For example, during the first go-round, Peter Orszag, Obama’s budget director at the time, could muster only a relatively weak defense of charitable-deduction-capping on his OMB Director blog, basically saying something akin to, “Oh come on, it won’t be that bad, or at least we don’t think so.” Not too reassuring.

“Hands off the charitable sector” is always a neat bipartisan strategy, one that worked in 2004 with Pennsylvania’s Rick Santorum and New York’s Chuck Schumer joining forces to decry potential new regulations and oversight. The bitter partisanship in the House and Senate today ensure that the concept won’t go anywhere—except that there is a bipartisan super committee charged with finding $1.2 trillion in deficit reductions, which could involve a mix of tax reform. While President Obama couldn’t even get Congress to consider a bill that would create a couple of million jobs, the super committee could possibly come up with a tax reform proposal involving simplification and progressivity that might touch on the charitable deduction.

Likely? Not by a mile. So what’s going on? Why the ruckus as though the very future of the nonprofit sector is in peril? There is no one unified voice for the diverse nonprofit sector on this issue, but we can guess at a couple of themes:

The One Percent Club: With the Occupy Wall Street protests forming a dramatic backdrop, there’s no denying the odd-couple pairing of the nonprofit sector’s words of support for the Occupy movement right alongside its diehard protection of a valuable charitable tax deduction for the nation’s upper crust. Adumbrating the Occupy movement, Nobel Prize-winning economist Joseph Stiglitz last May wrote that the nation’s top 1 percent took in one quarter of the nation’s income and accounted for 40 percent of the nation’s wealth. Not surprisingly, with that much dough under their control, the top 1 percent also account for a disproportionate amount of charitable giving. Maybe the nonprofit sector will come around on this issue the way it eventually did on the estate tax, which many rich donors stridently opposed because it affected the disposition of their discretionary wealth. It took a long time for Independent Sector and the Council on Foundations to begrudgingly agree that the estate tax was a key component of the national revenue mix, but they finally did as public opinion shifted. It may take a similar evolution in public opinion on the charitable deduction issue, even as some of the nation’s philanthropic best and brightest take issue with their leadership organization’s unyielding opposition (for an example, see the commentary of Gara LaMarche, at the time still with the Atlantic Philanthropies, and Ralph Smith, vice president of the Annie E. Casey Foundation, who jointly deviated from the Council on Foundation’s orthodoxy on this issue during their mock debate at the Council’s annual meeting last April.

Panic in the Streets: With a membership composed of state nonprofit associations, the National Council of Nonprofits tends to be a voice for the smaller nonprofits, while Independent Sector is seen as representing larger groups and foundations and the Council on Foundations itself is in the sway of the behemoth grantmakers. Like the other nonprofit leadership organizations, the National Council opposes touching the charitable deduction, but its position is a bit more nuanced. Long concerned with the array of problems facing local nonprofits, the Council is quite concerned about the cumulative impact of reducing the federal budget deficit “through spending cuts, entitlement reforms, and changes to the tax code.” Perceiving a cascade of financial challenges on nonprofits, the Council’s position seems to be that touching the charitable deduction, even if it wouldn’t have a huge impact on many on the members of state associations, is just one more attack on a nonprofit sector buffeted by an economic perfect storm. Perhaps others share this concern, or feel that a charitable-deduction cap that potentially reduced the giving of the rich would have trickle-down effects across the charitable sector, but most trickle-down theories of economics have not stood the test of time very well.

Camel’s Nose in the Tent: Assume for the moment—and you can with confidence—that the actual impact of President Obama’s proposal is really quite minor. Why the hue and cry? Sometimes, in politics, the concern is not about the specific issue at hand at the moment, but at what might follow. Part of the concern in 2004 with the Senate Finance Committee’s hearings on charitable accountability was that the outcomes might lead to mandated increases in foundation payout rates, increased disclosure of grantmaking by donor-advised funds, and restrictions on nonprofits’ and foundation’s administrative costs. A similar nervousness underlies the charitable deduction debate. What some big charities, universities, hospitals, museums, and foundations might be thinking is this: Could opening up debate on the charitable deduction one day lead to tax policies that favor certain kinds of charitable activities and not others? Under current definitions of charity, which haven’t been touched in eons, just about anything—from the shabbiest homeless shelter to the ivy-covered walls of Harvard University—can be called a nonprofit so long as the nondistribution constraint is followed. The fear is that opening up debate on the charitable deduction could lead to new definitions of what is and isn’t a tax-exempt charity.

The Danger of Simplification: As presidential candidate Herman Cain gains in popularity touting his 9-9-9 tax-reform strategy, nonprofits and donors alike might be concerned that a seemingly attractive charitable deduction simplification strategy—for example, shifting to a straight charitable tax credit or some other cut-and-dried approach—might seduce legislators but could hurt nonprofits even worse than President Obama’s proposal to cap the value of the charitable deduction at the 28-percent level. Moreover, a tax credit—unlike a tax deduction—moves charitable giving clearly into the category of federally-subsidized funding. Academics and policy makers have long debated what it means to charities and charitable giving if the deduction (or a credit) is considered a federal subsidy. It’s easy to predict. A credit is a dollar-for-dollar write-off against taxes owed. The federal treasury loses a buck for every dollar of tax credits offered. For the charitable deduction on the other hand, the theory is somehow that for every lost dollar of federal revenues, more than a dollar is raised for charities.  Like the low-income housing credit and the New Markets Tax Credit, converting the deduction to a credit means there will be an explicit budgetary score by the Congressional Budget Office—in other words, a single price tag on the federal subsidy for charities. Subjecting charities to annual Congressional debates and grandstanding is a nightmare many nonprofit leaders don’t want to endure.

Opposed to the Public Space: Even many of the most liberal nonprofit leaders are apprehensive about the notion of Congress playing with the charitable deduction (or charitable tax credit) to “pick” winners and losers (as though government doesn’t routinely do that anyway). Major donors—and less major ones too—are frequently heard to say that they would rather make their own decisions about what kinds of public services they think are worthwhile rather than turning that decision over to government. But denying Congress a voice in tinkering with the charitable deduction (or the definition of charity) is really a perpetuation of the type of oligarchic political control that many people believe harms our democracy. Many mid-sized and smaller nonprofits do not seem to see that in important ways, their dead-set opposition to changes in the charitable deduction does not in fact enhance democracy. Rather, it further cedes control over our economy and society to the wealthy, who already dominate the realms of business and finance, who produce a highly disproportionate share of political campaign contributions, and who receive public subsidy for their own consumption of the charitable activities they support through their donations.

The Sky Is Falling—Not

Our guess is that if Congress or the super committee do touch itemized deductions, the slice that affects charity won’t be on the table. The home mortgage interest deduction and the state and local tax deduction consume more than two-thirds of the value of all itemized deductions. If the real estate industry somehow rolls over and plays dead, the mortgage interest deduction might be adjusted, but in a recession where the housing market is still on life support, that is very unlikely. If Congress falls asleep at the wheel and does allow a cap on charitable deductions, it probably won’t follow the President’s plan, but instead move the cap higher in the income chain, probably from the $250,000 household income level of the President’s proposal to the $1 million income plateau that is more consistent with the Democrats’ meme about “millionaires and billionaires” (not to mention consistent with Senate Majority Leader Harry Reid’s proposal of a 0.5 percent millionaire surtax on millionaires to pay for the jobs bill).

It is hard to imagine any of this happening, though. The debates about price elasticities, optimal incentive structures, caps, and floors undoubtedly leave most members of Congress cold. Their take on this debate will not be about what is optimal for the U.S. Treasury or for nonprofits (not that it ever is). They will make their decision based on the collision of two factors: their political calculus and their personal values. But the pilgrimage of nonprofit leaders to Capitol Hill this week suggesting that the nonprofit sector would suffer great damage from a charitable deduction cap doesn’t help the educational process that ideally informs policymaking. It has all the overblown scare rhetoric of the corporate sector’s reaction to Sarbanes-Oxley following the Enron collapse. It isn’t true. What we know about the charitable deduction and the President’s proposal is this:

  • While the super-wealthy do not give nearly as much to charity as they could or should, they account for a large amount of tax-deductible charitable giving. Households with incomes over $10 million, less than one percent of all tax filers, generated over $20 billion in charitable deductions in 2008, according to a recent presentation by Catholic University law school professor (and former legislation counsel for the Congressional Joint Committee on Taxation) Roger Colvineaux for the Urban Institute.
  • High net worth givers give more than half of their donations to education, donor-advised funds and foundations, and health. They are not big givers to charities meeting basic human needs or combined funding appeals (such as United Way campaigns). If a cap were indeed to reduce the charitable giving of the super wealthy, it might be noticed in the Ivy League, but it probably wouldn’t be felt in the soup kitchens.
  • Economists estimate the impact of a charitable deduction cap using econometric models. The numbers vary, but increasingly, the consensus is that the impact on giving would be minimal, maybe a 1 or 2 percent reduction at most. For the very wealthy, it might not factor in at all, because their incomes are so large that the impact of a smaller charitable deduction for them is inconsequential.
  • While it might not be possible to predict with much precision what would occur by capping charitable deductions, you can predict much more accurately how much more revenue the federal government would collect if deductions for higher income people were calculated at a maximum of a 28 percent marginal rate rather than 33 percent, 35 percent, or higher (if the President manages to raise the tax rate on those “millionaires and billionaires” we keep hearing so much about).
  • Because the superwealthy already favor big institutions such as universities, hospitals, foundations, and donor-advised funds, the tax system is already picking winners and losers: The winners are endowed institutions where the charitable contributions stay put, and the losers, relatively speaking, are the charities that largely spend the contributions they receive in order to pay for programs and services.

The nation is only part way through what will probably turn out to be a prolonged state of economic contraction. Charitable funds are going to be increasingly important in sustaining the nonprofit sector to deliver value to the public it serves. In a time of resource constraint, our nation should be thinking cautiously but creatively about what kinds of public goods we want to subsidize with government funds. How we allocate the public subsidy of the charitable deduction should be part of that equation. For nonprofits to protest even pursuing an inquiry, or for the big endowed nonprofits to hide behind the majority of the nonprofit sector that is small or middle-sized to claim that modifying the charitable deduction would be harmful is just embarrassing. It’s sort of like a traditional old special interest.