Jewish groups are preparing to fight cuts to the charitable tax deduction that both President Barack Obama and Republican presidential nominee Mitt Romney have proposed to reduce the budget deficit.
If enacted by Congress, the cuts would come at a time when charitable giving is flat and demands on charities are up because more and more people are hurting from the economic downturn. “You will see the Orthodox Union and the charitable sector come out with a bipartisan agreement to oppose the cuts,” said Nathan Diament, director of the Orthodox Union’s Institute for Public Affairs in Washington.
“So far we have had solid, bipartisan support in Congress, which has turned away President Obama’s previous proposals [to reduce the deduction],” he said.
Ron Soloway, managing director of government and external relations at UJA-Federation of New York, said his organization has “communicated the importance of the charitable deduction to our elected officials,” and that after the election it will be “prepared to speak to any proposals being considered. …”
He added that at a time of “declining government resources, it is even more important that private philanthropy is incentivized by the tax code so that the community good can be preserved.”
To help meet the increased demand for services from those in need as poverty rates here rise, UJA-Federation earlier this year increased by more than $3 million its support of the Metropolitan Council on Jewish Poverty — a 100 percent increase from 2002.
Since taking office, Obama has sought to reduce the value of all itemized deductions and other tax preferences to 28 percent for married couples filing a joint return with incomes above $250,000, and single taxpayers with income above $200,000.
Obama, who said this proposal would reduce the deficit by $584 billion over 10 years, would in effect increase taxes on the top 2 percent of income-earners who are now in the 33 percent and 35 percent tax brackets. Such a move would seek to balance a current inequity in which a middle-class family donating $1 to a charity gets a 15-cent tax deduction but the wealthiest get a tax break of more than twice that amount for the same donation.
Tim Delaney, president and CEO of the National Council of Non-Profits in Washington, noted that the administration’s “stated rationale has been that the wealthiest shouldn’t get a greater tax break than the middle-class.”
Should it become law, a married couple earning more than $250,000 and making a $10,000 donation to a charity would see its tax deduction reduced to $2,800 from the current $3,500. Experts have estimated that such a change could reduce donations to American charities by about $4 billion annually. Total charitable giving in the U.S. reached $298.4 billion in 2011.
Diament has suggested that instead of cutting the charitable tax deduction for the wealthy, the deduction should be raised for middle-class donors. That would cut their taxes and spur more charitable giving, he argued.
“Even President Obama and others who have put forward these [charitable deduction cuts] in the past can’t deny that it is going to have an adverse impact on charitable giving,” Diament told The Jewish Week.
“There will be less incentive [to give],” he added. “The incentive structure was there for a reason. Part of it is social policy, which is to say that there are things in society that need to get done and government doesn’t do it best. Government wants to partner with the charitable sector to make sure they get done — and the tax deduction is how government does it.”
Although Romney has not been explicit about the contours of his proposal, he has said he would seek to cap the dollar amount of all itemized deductions. Just prior to the first presidential debate, he suggested the cap might be $17,000.
During the Oct. 3 debate, he still did not have the precise number, saying: “Make up a number — $25,000. $50,000. Anybody can have deductions up to that amount. And then that number disappears for high-income people.”
For people in the top tax bracket, analysts said Romney’s proposed 20 percent rate cut would increase the price of giving by 10.8 percent. That suggests an equivalent drop in donations — even before taking into consideration the limit on deductions and his proposed repeal of the estate tax. It has been estimated that the repeal would reduce charitable bequests by between 22 and 37 percent, or between $3.6 billion and $6 billion each year.
Romney said he is making these proposals to simplify the tax code in order to stimulate economic growth.
Despite his lack of specificity, it is clear that should either Romney’s or Obama’s plans be approved by Congress, they would have a significant impact on charities, according to analysts.
“By definition, the plans will limit large givers,” said Joseph Rosenberg, a research assistant at the Urban-Brookings Tax Policy Center in Washington.
Romney’s proposal, analysts said, would have its greatest impact on upper-income, blue-state residents like suburban New Yorkers whose larger state and local tax bills and home mortgage interest payments currently provide the biggest sources of deductions.
“There is a general belief — and evidence supporting it — that taxpayers do respond to the tax incentive to donate to charities,” Rosenberg said. “So it is very reasonable to think that if you eliminated [or reduced] the charitable deduction they would respond by giving somewhat less. It’s problematic to say how much less. … It boils down to what motivated the gift.”
James Ferris, director of the Center on Philanthropy and Public Policy at the University of Southern California, pointed out that charitable giving has been flat, and he said a cut to the charitable tax deduction “is not something [charities] can really plan for.”
Ferris said that nonprofit groups most likely to be affected are the larger ones, such as universities, cultural arts museums and hospitals.
Asked about faith-based groups, he replied: “Most donations to faith groups come from individuals who are less likely to itemize.”
But that has not stopped the Jewish Federations of North America, one of the country’s largest philanthropies representing some 150 Jewish federations, from fiercely objecting to Obama’s proposed lowering of the charitable tax deduction. A spokesman said he could not comment for this article because it is too close to the election, but JNFA has been outspoken in the past.
Last Feb. 13, Kathy Manning, the organization’s board chair, said in a statement that Obama’s proposed reduction of charitable tax deductions was “the wrong approach” at a time when “so many Americans in desperate financial straits are dependent on the services of charitable organizations.”
William Daroff, the JFNA’s vice president for public policy, said at the time that such a change in the tax code was “misguided” and would “result in America’s charities losing billions of dollars a year in private support that our country desperately needs.”
But Diament said he is hopeful Congress would continue to defeat such proposals as it has in the past. He noted that two weeks ago, Sen. Marco Rubio (R-Fla.) “explicitly said charitable deductions ought not be eliminated or reduced — and we have other allies on the Republican side, too. So it’s not so obvious that Romney or Obama would be able to run with this proposal even if they wanted to.”