• February 1, 2015

Key Panel Seeks to Revamp Charity Tax Breaks

Sen. Erskine Bowles and Sen. Alan Simpson

Alex Brandon/AP Images

Erskine Bowles, a former White House chief of staff, and Alan Simpson, a former Senator, are co-chairmen of the National Commission on Fiscal Responsibility and Reform.

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close Sen. Erskine Bowles and Sen. Alan Simpson

Alex Brandon/AP Images

Erskine Bowles, a former White House chief of staff, and Alan Simpson, a former Senator, are co-chairmen of the National Commission on Fiscal Responsibility and Reform.

The chairmen of President Obama's deficit commission—in their final plan for improving the nation's fiscal health—today offered a proposal to eliminate the charitable deduction and replace it with a 12-percent tax credit.

However, only people who had donated a certain percentage of their income would  be eligible.

The new plan, which is expected to be voted on by the full commission on Friday, proposed changing the charitable tax break as part of a broader effort to simplify the tax code, reduce the deficit, and lower individual and corporate income-tax rates.

The plan would end all itemized deductions and create three new individual tax brackets, from 12 percent to 28 percent.

The 12-percent credit for charitable gifts would be available only for amounts beyond 2 percent of the taxpayer's adjusted gross income.

It would be "nonrefundable," meaning only people who owed income tax could claim it. (Several liberal groups this week proposed a refundable tax credit that people could get even if they owed no taxes.)

By applying the same percentage across the board, the new credit treats taxpayers more equally than the current system, which favors high earners because they are more likely to itemize and earn a bigger tax break than people in lower tax brackets.

Small Donors

However, imposing the 2-percent minimum would disqualify many small donors.

"This is very little incentive for charitable giving," said Laura Kalick, a nonprofit tax lawyer in Bethesda, Md., adding that a 12-percent credit is not a huge tax break.

She said some charities would also be hit with a "double whammy" because the deficit plan would also end the tax exemption for interest on new state and municipal bonds—a mechanism that some organizations like hospitals and universities use to raise money for building projects. That could make the bonds less interesting to investors.

Rosanne Altshuler, a professor of economics and tax expert at Rutgers University, noted that today donors in the top tax bracket can get a 35-percent deduction for their gifts, so the new proposals would raise the cost of giving for them. At the same time, she added, "We may see more giving from people who were previously non-itemizers."

A fair number of taxpayers are likely to meet the 2-percent threshold, she added. She pointed to Treasury Department data showing that more than half of all taxpayers who itemized in 2002 donated to charity more than 2 percent of their adjusted gross income.

Range of Ideas

Today's proposal is the latest in a series of recent plans that seek to restructure the tax code and lower the federal deficit. All of the plans include measures that would eliminate or reduce the federal tax deduction for taxpayers who make contributions to nonprofits.

The new proposal differs from several options that the chairmen—Erskine Bowles, a former Democratic White House chief of staff, and Alan Simpson, a former Republican senator—proposed in a draft report last week.

Those included lowering income-tax rates and completely ending the charitable tax break unless it could be paid for by raising those rates, or leaving it as a deduction but only for giving above 2 percent of gross adjusted income.

Their final report—which warns that "everything must be on the table" because "America cannot be great if we go broke"—said its specific recommendations on overhauling the tax code are meant to be "illustrative" and that there could be other ways to achieve the same goals. Those goals include maintaining some kind of incentive for charitable giving, it said.

If 14 of the 18 members of the panel, formally known as the National Commission on Fiscal Responsibility and Reform, endorse the plan on Friday, it will go to Congress for a vote. Given that a majority of its members are members of Congress and that many of the proposals affect politically sensitive issues like Social Security and the mortgage deduction, many observers are pessimistic that will happen.


1. mlwyland - December 01, 2010 at 02:38 pm

One needs to have a long memory to know why charitable deductibility is available only to those Federal income tax filers who itemize deductions.

Tax reform in 1986 dramatically increased the standard deduction while eliminating some commonly used deductions, including that for charitable gifts. In effect, the tax law assumed that *everyone* makes at least some gifts to charity each year, and included the tax benefit in the increased standard deduction. Those who itemize their returns would not receive the benefit of the increased standard deduction, and would therefore be allowed to itemize.

2. nonprofprof - December 01, 2010 at 03:40 pm

Et tu, Barrack? This is a horrible, horrible idea. Charities these days, especially those in social/human services, are the "elephant brigade" -- picking up more and more slack for cuts in government services. But apparently now they are supposed to do it with even less of an economic incentive?!

How about a national boycott? A "day without a nonprofit"? A shutdown of the charitable sector. Perhaps when our clients start lining up at the White House gates, there will be some recognition that charitable giving incentives should be INCREASED, not cut.

3. lindagarrison - December 01, 2010 at 04:38 pm

This is so counter-intuitive it's pathetic. We off-load more and more social services to the nonprofit sector at the same time we are intentionally disincentivizing potential donors? Wow, that makes sense now, doesn't it?

4. dauterson - December 01, 2010 at 04:48 pm

Governmental bait and switch - and the slant of the COP article is to endorse this?

Remember that this is part of a "deficit reduction plan" - meaning more money to----- THE GOVERNMENT! Where will that money come from? Right out of the pockets of the nonprofits.

The other issue here (raised above) is that charitable benefit goes far beyond a dollars and cents, zero sum transaction. When deductibility of donations to charity was enacted, the rational was that even though the deduction decreased the amount of taxes collected, this depletion was justified “based upon the theory that the Government is compensated for the loss of revenue by its relief from financial burden which would otherwise have to be met by appropriations from public funds, and by the benefits resulting from the promotion of the general welfare.” H.R. REP. NO. 75-1860, at 19 (1938).

Why is deficit (caused by the politicians) reduction being loaded onto the backs of the charitable sector? Once again, history repeats itself as a government now demands "make more bricks without straw."

5. peter_panepento - December 01, 2010 at 05:26 pm

dauterson -- I'm curious about why you think our reporting on this issue is an endorsement. We're reporting on what what is being proposed and what people are saying in response.

6. stephenforbus - December 01, 2010 at 05:58 pm

I definitely agree with those posts which say that the non-profit world is already filling in more and more gaps caused by cut backs in federal, state, and county funding, and it is ludicrous to believe they could/should do so with less donor support. Most non-profits operate without direct government funding, and rely on charitable contributions to support their services and operations. If non-profits fail, the trickle down affect will actually increase the federal deficit by having more people out of work, paying less tax revenue, and more likely to need government assistance.

Stephen Forbus

7. mlwyland - December 02, 2010 at 04:14 pm

Theer is significant research that indicates that charitable deductibility of a gift is a major motivating factor in a very small percentage of donors. What is more likely is that, when looking specifically at major gifts, changes in tax law may affect *how* and *when* such gifts are made, not whether.

The debate on whether, and to what extent, nonprofits are being asked to step in where Federal, state, and local governments in the US are stepping back is a very delicate one. First, it requires a relatively short timeline to argue (1930s New Deal, or, more likely, 1960's Great Society). Second, it requires consensus on where the "natural" location for social services belongs; government (and if so, which one(s)), the private sector (including especially charities and donors), or a shared responsibility (based on what criteria?).

Correlating proposed changes in charitable tax deductibility with changing reliance on charities implies that *increasing* deductibility would reasonably require increased charitable commitment to social services as well as implying that decreases in deductibility should result in decreased third sector responsibility. That's an uncomfortable argument to make, in my opinion.

8. regressor - December 03, 2010 at 01:17 pm

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9. ellieabrams - December 06, 2010 at 03:04 pm

Hi Suzanne,
What will this mean for corporations' charitable donations? Same thing? What are the implications there?

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