Budget Center Defends New Proposals to Limit Charitable Deductions

The Center on Budget and Policy Priorities has taken issue with a coalition of nonprofit leaders that criticized a Congressional proposal to cap the tax breaks for charitable donations at 35 percent as a way to help pay for a health-care overhaul.

“The letter claims that limiting the value of the deduction for charitable congtributions would create a disincentive for affluent individuals to donate,” Robert Greenstein, executive director of the liberal think tank, says in a new report. “This ignores the fact that the proposal would merely keep the incentive for high-income people to donate where it is today.”

President Obama has proposed letting tax cuts enacted during the Bush Administration expire in 2011, which would raise the top tax rates to 36 percent and 39.6 percent — up from today’s 33 percent and 35 percent. He also proposed capping the tax breaks for itemized deductions at 28 percent.

Several Senate Finance Committee members have proposed instead that the limit remain where it is today, 35 percent, instead of rising along with the new tax rates as would normally happen.

Mr. Greenstein also criticizes the coalition for “cherry picking” findings from studies on how tax incentives affect charitable giving and for suggesting the new limits would cause donors to delay gifts.

“Wealthy donors already have a reason to delay contributions now, at a time when they are badly needed, because the tax subsidy for such donations is scheduled to rise in 2011 to 39.6 percent,” Mr. Greenstein writes. “Acting now to keep the tax subsidy at 35 percent would remove that incentive. If anything, therefore, the proposal would accelerate donations, not delay them.”

The Finance Committee is now debating a health-care bill drawn up by Sen. Max Baucus, the Montana Democrat who chairs the committee. Mr. Baucus did not incorporate the proposals on itemized deductions into his bill.