As Congress reconvenes for the year-end lame duck session to address a number of critical tax and spending issues related to the fiscal cliff, there are reports that a cap on the value of the charitable deduction is under consideration as a potential short-term revenue solution. Although these discussions deal with myriad complex issues, here are some key reasons why capping the charitable deduction is not a good idea for our communities and our state:
- The charitable deduction encourages more charitable giving. Although we can have a valid debate about the extent to which charitable giving is influenced by the charitable deduction, several reputable studies have shown a link between the charitable deduction and the level of charitable giving. A 2011 study by the Center on Philanthropy at the University of Indiana, for example, showed that charitable giving would have decreased by $2.43 billion in 2010 if there had been a cap on the charitable deduction. A survey conducted by United Way Worldwide in November revealed that the vast majority of Americans (79%) believe reducing or eliminating the charitable tax deduction would have a negative impact on charities and the people they serve. Furthermore, nearly one-third of Americans (30%) said they would have to reduce their charitable contributions without tax incentives – and most said they would have to cut back on their donations by a “significant amount.” I’ve always said that the charitable deduction doesn’t necessarily encourage people to give, but encourages them to give more.
- Capping all itemized deductions would reduce charitable giving. Some proposals have been floating around Washington that would lump together all itemized deductions in one bucket and cap them at a certain dollar amount (amounts like $17,000 and $25,000 have been suggested by various legislators and policymakers). But Floridians’ average deductions for mortgage, real estate taxes, and state/local income taxes total nearly $28,000, according to figures compiled by The Wall Street Journal, so with caps of $17,000 or $25,000 there would be nothing left for the charitable deduction, thereby eliminating an important incentive for charitable giving.
- Caps and credits have the greatest negative impact on charitable giving. As I explained in an earlier blog post, a recent study by the Urban Institute’s Tax Policy and Charities project showed that caps on the charitable deduction or charitable donation credits (which would reduce a person’s taxes by a set percentage of his or her donations) would have the greatest negative impact on giving – resulting in as much as a 10% drop in donations. However, floors for charitable deductions (which would allow full deductions for a person’s total charitable giving above a set amount), would have little impact on giving. That’s because studies have shown that giving incentives like the charitable deduction have a bigger incentive on the last dollars given, not the first.
- Limiting the charitable deduction will affect Floridians at all income levels who give to charity. It’s a myth that limits on the charitable deduction only impact wealthier Americans. More than half – 52% – of Floridians who used the charitable deduction in 2010 had an annual income of less than $75,000, according to FPN’s analysis of IRS data. And more than half – 56% – of the charitable dollars reported on Floridians’ federal tax returns were from people earning less than $200,000 per year.
At a time when 85% of nonprofits are reporting an increase in demand for their services over the previous year, while facing declines in contributions from all sources, there couldn’t be a worse time to do anything that would cause charitable giving to drop even more. And with Florida’s nonprofit sector being the fourth-largest employer in the state, there couldn’t be a worse time to take any action that would not only result in fewer people in need being served but more Floridians being unemployed.
If you want to learn more, the National Council of Nonprofits has a useful infographic on the dangers of capping the charitable deduction, and you can find more useful information about preserving the charitable deduction from the Council on Foundations and Independent Sector.
– David Biemesderfer, President & CEO, Florida Philanthropic Network.