Key Senator Asks Whether Charity Tax Break Is Fair to All

Sen. Max Baucus, chairman of the powerful Senate Finance Committee, on Tuesday raised questions about whether it’s wise for the tax code to allow upper-income people to write off their charitable gifts while people who are poor or middle income—and don’t itemize their tax returns—can’t do the same.

“Only one-third of taxpayers itemize their returns,” Mr. Baucus said. “That leaves two-thirds of all Americans unable to receive a tax benefit for charitable deductions.”

Mr. Baucus made his comments to show the kinds of issues he thinks should come under deliberation in a overhaul of the code. His aides said after the hearing that he does not have a view yet on how the charitable deduction should be structured under a new tax system but that he wanted to use it as an example of the types of concerns that should be discussed.

Nevertheless, his comments are a sign that the charitable-deduction will continue to come under close scrutiny as Congress considers an overhaul of the tax code. President Obama last month renewed his call to limit the value of charitable tax breaks to help close the nation’s mounting federal deficit.

Mr. Baucus said at Tuesday’s hearing he was not concerned simply about fairness issues for those who itemize on their taxes and those who don’t. He said he was also concerned about whether the tax code was one reason for a widening gap between rich and poor.

He wondered, for example, if it was smart policy to allow people who are very rich to get more-generous charitable deductions than those who are less affluent.

A donor at the highest income-tax rate of 35 percent saves 35 cents in taxes for every dollar donated, while a taxpayer with a 10-percent tax rate saves just 10 cents for every dollar contributed, Mr. Baucus said.

“As we focus on tax reform, we must ask whether our tax code has contributed to this disparity in income growth,” he said. “We should consider whether our tax system should take these disparities into account in some way, and we must question whether our tax code can better promote economic mobility and opportunity.”

Washington observers said Mr. Baucus’s remarks deserve attention from the nonprofit world.

“Any position [Sen. Baucus] takes has to be taken seriously, because he is an important player in tax reform,” said Sandra Swirski, executive director of the Alliance for Charitable Reform.

The Alliance for Charitable Reform was one of 22 groups from a nonprofit coalition that sent the White House a letter stating its opposition to the President’s proposal.

Scott Hodge, president of the nonprofit Tax Foundation, testified at Tuesday’s hearing to discuss the costs of various tax breaks. He noted that estimates from the White House Office of Management and Budget suggested that the current tax break for charitable giving reduced the tax payments owed by American by some $46.2-billion last year.

Mr. Hodge told lawmakers that the Joint Committee on Taxation found that 80 percent of the benefits of the charitable deduction went to taxpayers who earn more than $100,000.