$9-Billion in Gifts at Risk if Deduction Is Reduced, Study Forecasts

As nonprofits begin a new round of lobbying against President Obama’s longstanding efforts to limit the value of the charitable deduction, the American Enterprise Institute estimates that such a move would prompt donors to withhold more than $9-billion in gifts a year—a higher amount than previous studies have found.

That reduction would cause “massive” harm to the nonprofit world, Arthur Brooks, president of the conservative think tank and author of the study, told about 200 nonprofit leaders on Capitol Hill Wednesday. Mr. Brooks was there to press lawmakers to protect the favorable tax treatment of charitable gifts.

Throughout his presidency, President Obama has proposed limiting the tax savings that high earners can get for their itemized deductions, including those for charitable gifts, to 28 percent—down from the current maximum of 39.6 percent.

If Congress agreed to the 28-percent limit, donations would fall 4.4 percent, or $9.4-billion, Mr. Brooks predicted.

The biggest decline, he said, would come from the top 1 percent of earners, who would cut contributions by an estimated 24 percent. That is because virtually all of those taxpayers itemize their deductions and they would lose much of their tax incentive to give.

“You put those things together, and you’ll see a big bite out of the philanthropic economy,” he says.

Mr. Obama argues that the current tax system is unfair because wealthier people get a bigger tax break for giving than lower-income people do and that revenues are needed to temper spending cuts to programs that nonprofits care about.

Higher Estimate

The American Enterprise Institute estimate is larger than in previous studies. For example, a 2011 Tax Policy Center analysis estimated that gifts would fall by $1.7-billion to $3.2-billion a year under Mr. Obama’s proposal, while a study by Indiana University’s Center on Philanthropy that year said giving would have fallen by $3.2 billion over 2010 and 2011 combined if the 28-percent limit had been effect.

In each case, the findings represent a small slice of total donations; living Americans contributed $229-billion to charity last year, according to Giving USA, an annual tally of donations produced by the Indiana center.

The studies differ in their results because they are examining different circumstances.

For example, the Tax Policy Center did its study when the top tax bracket was 35 percent. That bracket was raised last year to 39.6 percent for individuals with taxable incomes over $400,000. Because the charitable deduction is tied to a donor’s tax bracket, the wealthiest donors now save $39.60 for every $100 donation, but savings would fall to $28 under Mr. Obama’s plan.

Lawmaker Support

Mr. Brooks presented the study’s preliminary findings at a briefing organized by the Charitable Giving Coalition, a 60-member group of charities and foundations.

They are trying to get Congress to keep charities in mind between now and December 13, a deadline for a House-Senate committee to agree to a fiscal 2014 federal budget plan. Nonprofits are vulnerable, they say, because lowering the deduction could be seen as a way to raise revenues during those talks and again in January when legislation to finance the government temporarily expires.

The group received support from two lawmakers, Sen. Jim Thune, a South Dakota Republican, and Sen. Ron Wyden, an Oregon Democrat, who on Wednesday began circulating a letter to colleagues asking them to block changes in current policy.

Longer term, the charitable tax deduction is among a slew of tax breaks that are under scrutiny as Congressional leaders consider broad changes in tax policy. In an effort to streamline the tax code and raise more federal revenue, key House and Senate lawmakers have said that every tax break is on the table.

The prospects for a tax overhaul this year are slim, but Charitable Giving Coalition members worry that as lawmakers consider changes, cutting the value of the charitable deduction will survive as a “template” for future deliberations.

But Michael King, president of Volunteers of America, said he’s optimistic that the charities are getting through to lawmakers. People have stopped lumping us in with the mortgage tax deduction,” he says. “You can see the education that’s been made on this issue.”