Obama Defends Proposal to Limit Charity Breaks for the Wealthy

President Obama stood by his proposal to limit tax breaks for charitable deductions for wealthy people at a prime-time news conference last month, but its fate in Congress remains murky.

The president said his proposal would help equalize the federal tax code, which now gives bigger tax breaks to people with higher incomes, and would have a limited effect on giving.

“I’ll tell you what has a significant impact on charitable giving is a financial crisis and an economy that’s contracting,” he said. “And so the most important thing that I can do for charitable giving is to fix the economy, to get banks lending again, to get businesses opening their doors again, to get people back to work again. Then I think charities will do just fine.”

2011 Start Date

President Obama has proposed limiting to 28 percent the income-tax break couples earning more than $250,000 (or individuals earning more than $200,000) can get for each dollar of itemized deductions, including charitable donations, starting in 2011.

People in the highest tax brackets can currently take deductions of 33 percent or 35 percent.

The money raised by the proposed change would be used to help finance a $318-billion “down payment” on a plan to revamp the country’s health-care system by bringing down costs and extending insurance to more people.

Many members of Congress, especially Republicans, have criticized the plan, saying it would dampen donations at a time when charities are suffering from the economic downturn.

The House and Senate last week each began debating budget outlines drafted by Democrats that endorsed the idea of setting up a “deficit-neutral” fund for health-care changes. But they left open the question of how to pay for the fund.

The Senate, while debating a national-service bill in March, rejected by one vote a resolution to oppose new deduction limits. Sen. John Thune, Republican of South Dakota, argued that the president’s plan would harm charities by lowering an incentive for giving, and he asked lawmakers to agree that Congress should preserve the “full” federal income-tax deduction “and look for additional ways to encourage charitable giving.”

But senators voted 49-48 against the proposal after Sen. Max Baucus, Democrat of Montana and chairman of the Senate Finance Committee, argued that the language was too broad.

“It would put the Senate on record as favoring preservation of incentives for charitable giving over all other priorities,” he said.

For example, it could prevent the Internal Revenue Service from cracking down on a charity scam or impede efforts to repeal the estate tax, which encourages charitable giving by allowing people to decrease the tax liability on inherited wealth, he said.

By a vote of 56 to 41, the Senate approved Senator Baucus’s proposal to remove the word “full” and just express support for preserving the charitable deduction. All those voting against were Republicans.

While Senator Baucus has expressed concerns about the itemized-deduction proposal, preferring to raise money by taxing some high-cost health-insurance plans offered by employers, Sen. Barbara Mikulski, Democrat of Maryland, said during the Senate debate that she supported the president’s plan.

“We believe these taxpayers, fortunate enough to be doing well and who also want to do good, will continue to give, even if it’s a 28-percent rate,” she said.

‘Solomon’s Choice’

Many nonprofit leaders have criticized the proposed deduction limits, although some are sympathetic because it would help charities by bringing down health-care costs. Independent Sector, a coalition of charities and foundations, issued a statement last month saying the plan offered a “Solomon’s choice.”

“In the end, the proposed policy change, combined with the current economic crisis, would diminish the flow of dollars to many charitable organizations, leaving many of our most vulnerable populations on the losing end,” it said.

At the same time, it said, skyrocketing health-care costs are forcing nonprofit groups to consider cutting benefits, and risk losing qualified staff, or cutting jobs, “both of which would diminish the programs they provide to communities.”

The coalition asked lawmakers to both “move forward on the health-care challenges facing our nation” and “preserve these and other strong incentives to encourage Americans to give back to their communities,” especially those of “substantial means.”