House Tax Plan Would Limit Charitable Deduction

Nonprofit advocates slammed a plan offered Wednesday by the chief tax architect of the House that would sharply limit charity tax breaks for people at all income levels.

Under the plan, people would be allowed to deduct only the amount above 2 percent of income they give to charity. That is a contrast to President Obama’s repeated efforts to limit the value of the deduction only for people who are in the highest tax brackets—an idea charities have successfully fought throughout his administration.

The charitable deduction was among many tax breaks that would be limited under the plan, drafted by Rep. Dave Camp, chairman of the House Ways and Means Committee. Many popular tax breaks, such as the mortgage-interest deduction, would also be limited or scrapped altogether.

“We closed a lot of loopholes and got a lot of junk out of the code,” Mr. Camp, a Michigan Republican, said at a Capitol Hill news conference.

Mr. Camp estimated that charitable giving would increase by at least $2-billion a year under his plan—in part because he said it would trigger economic growth that would stimulate donations. Experts at the Tax Policy Center, a nonpartisan research group, said that the approach of limiting the deduction would have minimal effect on donations while producing more revenue for the treasury.

Nonetheless, nonprofits are already rallying to fight the idea. Aside from the limits on deductions, they are unhappy that the number of people who would be eligible to take any charitable deduction at all would drop sharply. The proposal would prompt 95 percent of people to take the standard deduction, compared with the 25 to 30 percent who do so today, said Mr. Camp. Only people who itemize are allowed to take charitable deductions.

That plan, combined with the 2-percent threshold, would erode the tax incentive for middle-income Americans to give to charity, said Brian Gallagher, chief executive officer of United Way Worldwide.

“We will clearly be adamantly opposed to that,” he said.

Vikki Spruill, president of the Council on Foundations, said she feared that the proposal to alter the deduction would “impede the philanthropic sector’s efforts to serve the country,” but she welcomed other aspects of the plan, such as replacing the current two-tier excise tax on foundations with a single tax rate of 1 percent.

‘Very Distressed’

Political observers say they doubt Mr. Camp’s plan will get very far this year because of the partisan bickering likely to occur in the run-up to the November mid-term elections.

Still, tax plans as comprehensive as his could be a starting point for the conversation in 2015.

Because Mr. Camp’s approach would overhaul so much of the tax code, it is hard to estimate exactly how it would affect donations.

Among the major changes: The top tax rate for individuals would drop from 39.6 percent to 25 percent.

Some fundraisers say that will reduce the incentive to give, because a higher tax rate prompts some people to reduce their tax payments by donating to charity instead of writing a bigger check to the federal government. Yet other experts say the more cash Americans have available, the more they are willing to give to charity.

The proposal also would increase the standard deduction to $22,000 for couples who chose not to itemize deductions, including gifts to charity.

William Daroff, vice president of public policy at the Jewish Federations of North America, said he wishes Mr. Camp has proposed extending charitable deductions to people who don’t itemize.

Mr. Daroff said that while he is thankful that the charitable deduction wasn’t simply eliminated, he was “very distressed” by the proposal.

Extending the Deadline

Mr. Camp and his aides said charities had no reason to be concerned about a reduction in giving,

“The total amount of charitable giving is tied more closely to the health of the overall economy than to any specific tax policies that may be in place,” wrote the Ways and Means Committee’s Republican staff members in a memo accompanying the draft legislation.

Mr. Gallagher of the United Way disagreed.

“It’s been proven over and over again that positive tax incentives for charity matters and increases giving,” he said.

But that’s not what scholars at the Tax Policy Center say. Setting a minimum on charitable giving before the deduction kicks in wouldn’t reduce charitable giving at all, according to a 2012 study by the tax center, a project run by the Urban Institute and the Brookings Institution. Requiring taxpayers to contribute 1.7 percent of their gross income to charity before they could claim a tax break, the study found, would increase tax revenue by 10.4 percent to 11 percent while keeping overall donations unchanged.

Mr. Camp’s proposal also included one idea that could benefit charities: Americans would be able to write off any contribution they make before the April 15 deadline for filing tax forms, instead of cutting off on December 31 of the tax year. Eugene Steuerle, a Tax Policy Center scholar and former Treasury Department official, notes that “the very best time to advertise charitable tax saving is when people file their tax returns.”