The Charitable Deduction: NAST Tax Reform Advisory
May 12, 2011
This advisory discusses an important opportunity for personal reflection and prompt action.
At the moment, there is deep concern about the future of federal income tax deductions for charitable giving. The consequences can be serious. Please read below to learn more about this issue and what you can do.
The Tax Reform Environment
Last year, with the federal deficit looming large in the minds of many Americans, the President empanelled a bi-partisan National Commission on Fiscal Responsibility and Reform. After months of discussions, the Commission issued its report in December 2010. One of the issues highlighted was the need for tax reform, a perennial issue. Many discounted the Commissions proposals, even though there is significant agreement that the federal deficit is unsustainable and that something must be done. Additional reform proposals continue to be made as the deficit-reduction debate continues.
The United States system of progressive taxation is immensely complex. It involves income tax brackets ranging from 10% to 35%, with top earners paying a larger percentage of their income to the IRS than those with smaller earnings. Over 45% of Americans pay no federal taxes at all.1
The tax code involves countless tax exemptions, including tax credits and deductions, the largest of which is mortgage interest. Were there no exemptions, tax revenues would be $2.3 trillion.2 With exemptions, tax revenue is $1.2 trillion.3 (In some writings, exemptions are called tax expenditures. Only in Washington can monies not owed to an entity be considered expenditures for that entity.)
The Charitable Deduction
One deduction currently under serious pressure is the charitable deduction. Simply put, a taxpayer is eligible for a charitable deduction if he or she donates to an organization with 501(c)(3) tax-exempt status and is eligible to submit an itemized list of deductions.
The charitable deduction encourages eligible taxpayers to give to their favorite charities and non-profit organizations. The arts and higher education communities receive many of the benefits, as do other worthy sectors.
Giving to the Arts and Higher Education
In a time when federal and state spending for the arts and education is decreasing, arts organizations and institutions are hoping to rely more and more heavily on the generosity of private donors.
In 2009, U.S. private sector philanthropy was approximately $304 billion.4 Individual gifts accounted for nearly $227.5 billion of that total. 5
For the past few years, the non-profit sector, which includes individuals, institutions, organizations, and foundations, has provided approximately 43% of the funding for arts organizations6 and 6% of the funding for higher education.7
In 2009, the non-profit sector contributed $52 billion to the arts and all types of education, with $12 billion supporting the arts8 and $27.85 billion going to higher education specifically.9
For comparison purposes, in 2009, the combined grants to the arts from the NEA ($128 million out of its $155 million operating budget),10 the states ($343.1 million), and local governments ($832 million) equaled $1.3 billion or 10.8% of the amount provided through contributions.11 For 2010, state and local funding for the arts fell to $297 million and $765 million, respectively.12 If these trends continue, charitable giving to the arts will become increasing important.
The Charitable Deduction as Subject of Reform
There are three means of reducing the federal deficit: cutting expenditures, raising taxes, or a combination of the two. In any scenario, the charitable deduction is an easy target, particularly when it is portrayed solely as a benefit for those who give, ignoring the wide range of societal benefits produced by donated funds.
According to the Fiscal Year 2011 budget, if there were no charitable deductions and the tax code remained unchanged, the IRS would collect an additional $53.7 billion in revenue.13 For perspective, this amount is 0.376% of the $14.27 trillion federal deficit.
Members of the deficit reduction commission have proposed eliminating the charitable deduction altogether and replacing it with a 12% credit--instead of a deduction--for charitable gifts exceeding 2 percent of an individuals adjusted gross income. Such a credit would be nonrefundable in nature, meaning that only people owing income tax could claim it.
Meanwhile, the President has proposed capping deductions--both charitable and personal--for households with yearly incomes over $250,000. His plan would, for those in the top tax bracket, reduce their maximum tax deduction from 35%to 28%.
The most high-profile Republican budget plan is that of Congressman Paul Ryan (R-WI), Chairman of the House Budget Committee. He proposes reducing the deficit over time by changing the approach to entitlements and other expenditures, and by lowering tax rates across the board, including a reduction of the top tax rate to 25%. While his plan aims to eliminate or cap many of the current tax exemptions or deductions, it is silent at the moment on the issue of the charitable deduction. Ryan maintains that under his budget plan, such decisions would be for the House Ways and Means Committee to develop and propose.
Possible Effects on the Arts and Higher Education
No matter what the plan or source, an elimination of or a reduction in the charitable deduction could have a substantial impact on charitable giving, especially if coupled with other taxes that reduce discretionary spending by individuals and corporations. The arts and higher education, which rely heavily on the generosity of donors, would no doubt see a decrease in gifts from those for whom the tax burden has increased.
No one knows the exact effect of any proposal, but is estimated that with no tax deduction for charitable donations, annual giving would drop by 25% to 36%.14
We encourage you to consider how various tax reform proposals could impact your institution, the arts organizations in your community, and your own professional efforts.
The Current Opportunity
Bipartisan, bicameral talks about deficit reduction resumed on May 5, 2011. The future of the charitable deduction will be up for discussion. Remember that nothing can be done without House and Senate approval and a signature by the President.
If you are concerned about the issue of the charitable deduction, it is important that you share your thoughts and work cooperatively in all advocacy aspects with the institutional giving and development officers and other administrators at your institution.
If you wish to be heard as proposals are being drafted, you and your colleagues may contact the negotiators listed below and your representatives in Congress to express your views on the charitable deduction and how its loss, reduction, or maintenance could impact your institution and your work. If your members of Congress are not listed below, ask your representatives to share your views with those negotiating and reflect your views in their own discussions and actions. The best methods of contact are telephone and email. Due to security measures, it may take weeks before mail addressed to members of Congress is delivered. A complete listing of contact information may be found in the Congressional Directory of Congress.org. Of course, it is ideal if you know your Representative or Senators personally.
Rather than addressing the current proposals, which are all in a state of flux, you may be more effective if you focus on the principle of the matter: the future of the charitable deduction and the potential impacts of eliminating or reducing it in your circumstances and in general.
Whatever your position, it might be useful to state that no policy should be advanced to legislation until careful, honest, objective, and projective assessments have been made about its real impact. Members of Congress involved in the deficit reduction negotiations led by Vice President Biden are Senator Max Baucus (D-MT), Senator Daniel Inouye (D-HI), Senator Jon Kyl (R-AZ), Congressman Eric Cantor (R-VA), Congressman James Clyburn (D-SC), and Congressman Chris Van Hollen (D-MD).
Senators currently drafting legislation based on the recommendations of the Commission on Fiscal Responsibility and Reform are Senator Saxby Chambliss (R-GA), Senator Tom Coburn (R-OK), Senator Kent Conrad (D-ND), Senator Mike Crapo (R-ID), Senator Richard Durbin (D-IL), and Senator Mark Warner (D-VA).
For further information, please see:
Budget Proposals and Commission Report
The Presidents Budget for Fiscal Year 2012, Office of Management and Budget, The White House.
The Moment of Truth: Report of the National Commission on Fiscal Responsibility and Reform (December 2010)
The Path to Prosperity: Restoring Americas Promise, Fiscal Year 2012 Budget Resolution, House Committee on the Budget
Changing the Charitable Deduction Could Discourage the Most Generous Donors The Chronicle of Philanthropy (April 29, 2011)
Key Senator Asks Whether Charity Tax Break is Fair to All The Chronicle of Philanthropy (May 4, 2011)
Presidents Deficit Plan Seeks to Limit Charity Write-Offs by the Wealthy The Chronicle of Philanthropy (April 13, 2011)
- Jeanne Sahadi, 45% dont owe U.S. income tax (April 2011).
- Dave Cote and Ann Fudge, Tax reform requires bipartisanship (April 2011).
- Giving USA: The Numbers, Giving USA 2010, 5.
- How the United States Funds the Arts, National Endowment for the Arts (2007).
- National Center for Education Statistics, Institute of Education Sciences, U.S. Department of Education (2010).
- Giving USA: The Numbers, Giving USA 2010, 6.
- Scott Jaschik, Contributions to Colleges Drop 12% Inside Higher Ed (February 2010).
- Annual Report 2009, National Endowment for the Arts.
- Government Support for the Arts: Federal, State, and Local (1994-2009), Americans for the Arts.
- Government Support for the Arts: Federal, State, and Local (1994-2010), Americans for the Arts.
- Michelle Hirsch, Charities: Cut the Deduction, Pay a Big Price, The Fiscal Times (May 2011).
- "Take Action - The Charitable Deduction, Independent Sector (April 2011).