Editor’s Note: This is the second part of a two-part Cohen Report series on the charitable deduction and the fiscal cliff. Read the first part here.
The cavalry charge to Capitol Hill by advocates and lobbyists to protect the charitable tax deduction from congressional tinkering or elimination represents a large army of institutions and people who see the deduction as the lifeblood of the nonprofit sector. The lobbyists draw on a mammoth array of institutions that are either public charities or churches and their employees, volunteers, and contributors. If these institutions and people are mobilized and if they speak with one voice, it is all but impossible to imagine the lawmaker who will stand up on the House or Senate floor and proclaim himself the champion of reducing or eliminating the charitable tax deduction. Who would possibly have the temerity to stand up against the united onslaught of charity and philanthropy defending the charitable deduction against any and all slights, especially when backed by the $623 billion in assets of nearly 100,000 foundations recognized by the IRS?
Big Numbers and a Sacred Cow
Perhaps two-thirds of Americans, both tax itemizers and non-itemizers, give to charity. The Medical Expenditure Review Panel of the Department of Health and Human Service’s Agency for Healthcare Research and Quality estimates nonprofit sector employment at 15,588,636, of which 4,123,024 may be part-time workers. The Bureau of Labor Statistics estimates that 62,252,000 people volunteered in 2011. Between 2010 and 2011, the number of 501(c)(3) public charities shrunk from 1,280,739 to 1,080,130 because 272,000 public charities lost their tax-exempt status due to their failure to file a form 990-N with the IRS. But the sector still contains a large number of organizations, each served by an array of vendors supplying products and services. The estimated number of religious groups—churches, mosques, synagogues, etc.—that are not required to file with the IRS even though they benefit from charitable gifts is pegged at 327,000 by the National Center for Charitable Statistics. By virtue of the latent political power of the nonprofit sector embedded in all of these numbers, there’s no cause for nonprofit alarm, right?
As one not particularly astute politician noted in another context, “I’m not the brightest bulb, but I can count noses,” and there are lots of pro-nonprofit noses out there making the charitable tax deduction the red line over which no politician interested in reelection dare cross. Consequently, there is no vocal, elected champion for truncating the charitable deduction, and there is no one so politically insane as to call for its elimination.
Nonetheless, the charitable deduction does seem to be at some peril in the secret, behind-the-scenes negotiations occurring between the House of Representatives, the U.S. Senate, and the White House as they move toward a big or small bargain to avoid the so-called “fiscal cliff” at the end of this month. After nearly a century as an incentive in the U.S. tax structure for charitable giving, is the deduction, long sacrosanct in American politics, now teetering? Does the vortex of the $1.089 trillion federal budget debt (as of the end of FY2012) and the impending threat of across-the-board budget cuts in the form of sequestration put the charitable deduction “on the table” for modifications and cuts? What if you add in negotiations around entitlement programs such as Medicare and Social Security, and a need for new revenues through a tax increase on the wealthy?
The Specter of Charitable Cuts
When masses of nonprofit activists went to Capitol Hill last week for “Lobby Day,” there was only one real item on the table: President Barack Obama’s proposal to limit the value of the charitable deduction to 28 percent even if a taxpayer were paying taxes at 33 or 35 percent in the current tax structure (or as much as 39.6 percent that top income earners could pay under some scenarios after the expiration of the Bush tax cuts). That means that a taxpayer who pays at the 35 percent marginal rate would typically save $35 in taxes for a charitable donation of $100, but under the Obama proposal, that would be cut to a savings of only $28 dollars. Although nonprofits bemoan the impact of the Obama proposal, authoritative studies from the University of Indiana and from others suggest that the loss in actual charitable giving would be relatively minimal.
The Republicans haven’t been able to come up with a specific proposal in terms of how they would close loopholes to generate new revenues, but former Massachusetts Gov. Mitt Romney’s off-the-cuff mention of a dollar cap of $25,000 or $50,000 on all deductions has been pinned to Republican lapels and decried as much more harmful than the 28 percent cap. The Republicans, however, claim that there are plenty of other loopholes to close to reach their desired revenue targets without having to touch the charitable deduction. So the White House can say that its 28 percent deduction limit maintains charitable giving at close to today’s levels and that it is clearly much better than tossing the charitable deduction into a capped bucket of deductions that the Republicans might be likely to support. Meanwhile, the Republicans can say that they haven’t said anything to threaten the charitable deduction, unlike some of those pesky Democrats.
To listen to some of the national advocacy organizations, the notion that there would be any discussion of the charitable deduction is anathema. Independent Sector’s Diana Aviv, for example, compared any modification of the charitable deduction along the lines of President Obama’s proposal to drinking castor oil. “[T]he members of the nonprofit sector I represent,” Aviv proclaimed, “don’t want any part of it. It’s a medicine we’re not willing to drink.” While nonprofits (and churches) are a diverse and contentious lot, Aviv believes that this campaign to protect the charitable deduction is, in her words, “the first time I’ve seen the sector coming together. We’re like Rip Van Winkle waking up and saying, ‘This is not O.K.!’”
Between the approximately 600 members of Independent Sector, the 36 state association members of the National Council of Nonprofits (which represents 25,000 community-based nonprofits), and the members of the Alliance for Charitable Reform (a project of the Philanthropy Roundtable), nonprofit leadership groups have coalesced around the charitable deduction at this moment. However, the issues on the table at this moment are much more complex than an up or down vote on a 28 percent deduction. While the Alliance issued a strongly worded statement explaining that it would resist the White House’s call to debate the charitable deduction in the context of or even linked to the White House’s call for an increase in tax rates for wealthy income-earners, other members of this charitable giving coalition have diverged.
Independent Sector issued a statement explaining that it “advocates putting the nation on a sustainable fiscal path through a combination of reasonable spending reductions to both discretionary and mandatory programs, as well as revenue increases that maintain the progressivity of the tax code.” The latter means “a plan that includes a modest tax increase on the two percent of Americans who can most afford it.” The Council on Foundations, a politically moderate counterpart to the more distinctly conservative Philanthropy Roundtable, followed IS with a statement reiterating its steadfast support of the charitable deduction but acknowledging that, “In addition to spending cuts, revenue increases will be part of the solution to our fiscal challenges.”
Prior to the IS and COF statements, National Committee for Responsive Philanthropy Executive Director Aaron Dorfman wrote a sharp critique of the strict focus on charitable giving, upbraiding Independent Sector and other national leadership organizations. Last month, he wrote:
“If you’ve been listening to the associations that claim to represent nonprofits and foundations, you could easily believe that fighting off any change to the charitable deduction is the only issue that matters. Nothing could be further from the truth. Policies that incentivize charitable giving are important, but nonprofits should be far more concerned about several other elements of the fiscal cliff negotiations…Our number one priority should be to raise tax rates on the wealthy by allowing the Bush tax cuts to expire for Americans earning more than $250,000 per year. We should also seek to prevent cuts to vital programs that serve poor and elderly Americans and to secure strategic investments that stimulate the economy and create jobs.”
In all fairness, while dedicated to no changes in the charitable deduction, the National Council of Nonprofits has long been beating the drum about the potentially devastating impact of the impending across-the-board sequestration cuts that will impact domestic spending. The national nonprofit associations acknowledge the importance of fending off a meat cleaver-like approach to domestic spending cuts or an awareness of the need for more progressivity in the post-cliff tax structure. Dorfman’s argument, however, is that the charitable deduction debate is crowding out the other issues.
Voices from the Field
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When the national associations or national nonprofits debate these issues, the statements are well crafted, often showing the hand of the well paid lobbyists that some of these organizations have recruited to protect the charitable deduction. The powerful nonprofit lobby, however, is more than Beltway players like Aviv, Dorfman, Vicki Spruill of the Council on Foundations, or Tim Delaney of the National Council of Nonprofits. Those leaders are knocking on congressional doors, but we shouldn’t forget about the voices of local charities and churches, because every congressional district has bevies of charitable and religious institutions that are hanging on the future of the deduction—some, like colleges and universities, more than others.
What do local charities have to say about this debate, or more importantly, how do they speak about the panoply of fiscal cliff issues in which the charitable deduction is embedded? Charities around the country have a message for Congress and the White House. At some points, that message converges with the well-honed lobbying points of the national players, but at other points, it doesn’t necessarily look like part of a sector that has, in Aviv’s words, “come together.” Here are the issues of concern expressed by some of those outside of the Beltway.
Fear that Congress will eliminate the deduction
This is one grassroots nonprofit concern that seems to be more over-the-top than any others. It is a fear that seems to be stoked by national advocates even though the likelihood that the federal government would eliminate incentives for charitable giving is just about nil.
No one on Capitol Hill has called for eliminating the charitable deduction (though there are proposals, such as the Simpson-Bowles notion of replacing the deduction with a flat tax credit), but that is the fear truly motivating many nonprofits. Operating on a $7.5 million annual budget that is 60 percent funded by non-governmental resources, Mike Brose of the Mental Health Association in Tulsa pointed to “devastating consequences” for charities and religious entities if the charitable deduction were to disappear. Despite the lack of any politician on the Hill saying that he or she would deep-six the deduction, the fear that the deduction is on its last legs is palpable, embedded in a distrust of the legislative process. For example, given the potentially dire consequences of going off the cliff, someone may come up with a comprehensive fiscal cliff package that both parties reluctantly sign on to in desperation. The fear is that such a package might contain a mortal blow to the deduction that no lawmaker would ever acknowledge as his or her own piece of the puzzle. Remember the debates about how many members of Congress fail to read the legislation they’re signing? Remember how complex and lengthy a bill on the fiscal cliff might be? With such concerns in mind, one can sense the suspicion of some that feckless legislators might inadvertently buy into a deal that kills the charitable golden goose.
The psychological message
There is also a concern that, regardless of the relatively inconsequential impact of a cap on charitable giving, the issue is the signal that would be sent by Congress and the White House. Bill Dodge of the Rescue Mission of Utica says that the issue isn’t just that the cap would be targeted to cover only high-income donors. “Regardless of the size of someone’s income, there’s a certain psychological effect of putting a cap” on charitable deductions, he says. “When people are not encouraged to donate, they aren’t likely to be involved.” Representing Easter Seals, Katy Neas makes a similar point, saying, “we don’t want to create an environment or a culture where people think there’s less incentive to give.” The suggestion of such arguments is that capping the deduction would undermine consumer confidence about charitable giving.
Pitting charity against government spending
The message of some vocal nonprofits talking to their local members of Congress comes off with an anti-government flavor. In Utica, Dodge made a heartfelt argument for promoting personal responsibility, suggesting that government programs don’t do the trick. “I personally don’t believe that government is a way to handle the problem of poverty,” he says. “Individuals helping is a far more effective way to handle it…because what government gives you today, they take away tomorrow…People’s giving is a lot more stable.” Rev. Tom Laymon from Wilmington, Del. was even stronger on this issue: “When talking to people on Capitol Hill, particularly aides, when it comes to matters of charitable deductions and other ways charities are helped, it’s pictured as the federal government is subsidizing you,” he notes. “I want to say poppycock. We’re actually assisting the society and the government…We’re far more efficient [than government], we spend much less money on bureaucracy than government does.” Laymon and others cite the idea that a dollar given to a charity is worth a full dollar, but a dollar of a wealthy taxpayer’s income that is taxed and taken by government is worth only, say, 35 cents at the current top tax rate—in other words, the comparison of a dollar for charity versus only 35 cents for a government program. The consistent message from this school of thought is, in the words of Dan Streeter from the City Rescue Mission of Saginaw, Mich., “groups that rely on private giving are more effective, stretching their dollars.”
Regulatory disincentives to giving
Even just talking about changes in the charitable deduction scares charities. Streeter and others cited the change in the rules on donating automobiles. At Streeter’s organization, in the year prior to the changes in auto donations, they received 106 donated cars. After the new regulations, that number plummeted to six cars, and after the Obama administration’s “cash for clunkers” program, car donations haven’t recovered. According to Streeter, “it goes to show you that when the government starts to make changes to things, they don’t always know what is going to be the long term effect…We still see very minimal [car donations]…because of the perception that the scrutiny is too great.”
Small but real incentives for giving
Kim Klein, a nationally known expert in charitable giving and a critic of the all-out effort to defend the charitable deduction above everything else, questions whether the incentive is that much of an incentive for wealthy givers. She asked whether the seven cents that a wealthy donor would give up by taking a 28 percent rather than a 35 percent donation is all that critical an element in a wealthy person’s charitable decision-making. Klein says the idea that they would rather have seven cents than create jobs is a “cynical view of wealthy people.” She points out that “you don’t see wealthy people advocating for [the charitable deduction], just nonprofits.” But charities boil the issue down in such terms to their own donors. Even though wealthy taxpayers don’t give nearly as much to anti-poverty charities and other community-based charities as they give to universities, hospitals, and museums, the small number of wealthy donors motivates most charities to fight for the cap despite their small slice of the giving pie.
Impacts beyond individual giving
Despite the focus of the Obama proposal on individual tax rates, many people lump individual giving in with giving from local businesses. Even though the taxes on small businesses, for example, will actually decrease in President Obama’s budget proposals, some charities see caps on the giving of households with over $250,000 in income as filtering down to reductions in business giving. Front-line groups serving the poor seem to feel the potential loss of every nickel in the face of service needs and demands that are still increasing despite the purported economic recovery. Rev. Laymon acknowledges that many people give from the heart, but even religious donors who tithe “are encouraged by the charitable tax deduction to give even more—not that they would withhold their tithe, but the amount that they give is oftentimes determined by how much money they can free up.” He linked this to business people who donate to his charity, indicating that “some of the small business owners that give to us, their income is probably a quarter million and they’re going to be taxed…Charity is not their first priority,” Laymon says. “If something gets cut, we’re going to be the ones who get cut first.”
The Need to Expand Our Focus
Whether or not a grand (or a puny) bargain is struck to avoid falling over the cliff, nearly everyone agrees that the bargain won’t be the end of the situation. Klein powerfully talks about the need to take on the broader issues of tax reform and tax rates, suggesting that the nonprofit sector’s failure to do so is “shooting yourself in the foot.” She scoffs at the notion that the nonprofit sector has to focus its attention solely on the charitable deduction, calling it “self-absorbed and narcissistic.” She says that using the charitable deduction as a means toward tax reform may be the wrong place to start and that she could support the efforts to protect the deduction if nonprofit advocates were to also call for other revenues. As an industry, she calls the nonprofit sector a potential “powerhouse,” but finds that it isn’t acting like that in its narrow gauge lens on the fiscal cliff.
That’s where observers like Brose in Tulsa take a broader and more pragmatic view. He suggests that maybe by getting rid of lots of loopholes and thinking creatively about revenues, the solution might end up coupling the mortgage interest deduction and the charitable deduction to be saved in some sort of formula, actually heightening their value as incentives to taxpayers. Brose had an interesting coda to the entire debate. Clearly, the prospects of no deal before the fiscal cliff deadline are not small. But Brose muses, “Maybe Humpty Dumpty gets put together better after they go off the fiscal cliff.” It could well be that the nation is already rappelling over the cliff with the expectation that these battles will continue over tax reform, the debt limit, the next federal budget, and the piling on of program cuts and more program cuts. Implicitly or explicitly, everyone seems to recognize that whatever the scope of the deal struck before the clock strikes twelve on the fiscal cliff, the issue will be revived in the planned spring discussions of comprehensive tax reform.
Daniel Stid, a partner in the San Francisco office of Bridgespan, suspects that there may be an emerging divide in the nonprofit sector between those organizations dependent on government funding for much of their programs and those charities and churches that largely eschew government largesse. He suggests that the bulk of charitable giving by top taxpayers goes to universities, hospitals, and the arts, with only a small fraction going to front-line anti-poverty organizations, and thus a change in the deduction as suggested by the Obama administration would not undermine the most critical services delivered by the social sector. In fact, he suggests that there is some inconsistency to the argument that the homeless and the very poor would be harmed by an Obama-like cap in the charitable deduction when, in reality, cuts in government programs funding social safety net nonprofits might be much more devastating to those constituencies. If the nonprofit sector permits the charitable deduction and upper income tax rates to be pitted against government funding for anti-poverty and other safety net programs, Stid warns of a possible divide within the powerful nonprofit sector lobby of more than a million organizations, 15 million employees, and 62 million volunteers.
Religious groups and perhaps some charities have little interest in defending government spending and, in some instances, may be ideologically quite averse to it. If they isolate the issue as purely a goal line defense of a maximum charitable deduction, they will have saved their income streams but undermined the strength of the nonprofit sector to fulfill its mission to people in need.