Various proposals are swirling around Capitol Hill to dramatically alter the tax code. A number of these proposals include a complete elimination or significant reduction of the charitable gift deduction. While no formal legislation has been introduced so far, Capitol Hill watchers fully anticipate such legislation sometime this year. Therefore, the nonprofit sector needs to get informed now and develop a strategy for advocating for the position it adopts.
There are two particular proposals that have received a fair amount of media coverage:
- Elimination of the charitable gift deduction along with virtually all other tax deductions.
- Effective reduction of the charitable gift deduction by allowing deductions for philanthropy in excess of 2% of gross adjusted income. The deduction would be available to all tax filers and, depending on the proposal, might be capped.
Would either of these proposals negatively impact philanthropy?
Some people assert there would not be a negative impact. These people cite research that reveals that most donors are not particularly motivated by tax avoidance. They also point out that philanthropy was alive and well in the U.S. long before there were charitable giving incentives or, for that matter, an income tax. These people also observe that, since records have been kept, charitable giving has always been about 2% of Gross Domestic Product (1.7% – 2.3%) regardless of the tax policies adopted by Congress.
By contrast, a Bank of America study conducted by the Center on Philanthropy at Indiana University found that 48.3% of wealthy Americans would reduce charitable giving if the gift deduction were eliminated. Of the wealthy American surveyed, 19% said they would dramatically reduce giving. For the survey, “wealthy Americans” were defined as those with an annual income of at least $200,000 and/or $1 million in non-residential assets.
While there are contradictory views on the subject and even research reports that appear contradictory, an anticipated university-drafted white paper is expected to find that philanthropy would be negatively impacted by elimination of or a significant reduction in the charitable gift deduction.
If people experience an increased tax burden, they will have less disposable income with which to make a current cash contribution. Elimination or reduction of various tax deductions would contribute to an increased tax burden for people. Therefore, individual philanthropy would be negatively impacted.
Some have suggested that such damage might occur but would only be short lived as the nonprofit sector would respond with enhanced fundraising efforts. But, such thinking is purely speculative. Between 2007 and 2009, individual giving (adjusted for inflation) has dropped 5.7%. Nonprofit organizations are already suffering and already scrambling for resources. The people who depend on the services provided by the nonprofit sector are already suffering. Do we really want to hurt more people, more severely just to light a possible fire under the feet of development professionals?
Elimination or reduction of the charitable giving tax deduction will negatively impact individual giving. This negative impact will be on top of the negative impact the sector will feel when the individual tax burden is increased. Nonprofit organizations, which provide vital services to our society, should not have to take the double hit.
That’s what Michael Rosen Says… What do you say?