Bush Budget Plan Would Cut Many Programs That Support Charities; White House Offers Some Charity Tax Breaks

By Elizabeth Schwinn

The $2.8-trillion budget that President Bush sent to Congress on Monday would seek to stimulate charitable giving through an array of tax incentives, but it would also cut many federal programs on which charities rely.

Mr. Bush singled out 141 programs for elimination or steep cuts, a move that he said would save the government nearly $15-billion. Among the programs that would be eliminated under the president's plan are those that subsidize vocational, arts, and technology education, as well as a program that provides meals to roughly 400,000 needy elderly people. The White House would consolidate several programs to improve rundown neighborhoods into the Community Development Block Grant program, and reduce funds for that program. The administration sought to reduce the amount that hospitals receive from the Medicare program for the elderly.

Mr. Bush said such changes were needed to make money available for the government's fight against terrorism and to hold down the growth of the federal deficit.

Not all charities would see cuts in federal support under the president's plan. Mr. Bush sought increases in spending on some health-care programs. He requested $4-billion for a global program to fight HIV/AIDS, an increase of more than $740-million from last year. And he has proposed a new $100-million program that would provide students with vouchers to attend private schools or receive tutoring.

The President's request covers spending in the 2007 fiscal year, which begins October 1, 2006.

In his budget, Mr. Bush also asked Congress to extend several temporary tax breaks, including repeal of the estate tax.

Under current law, the estate tax will be phased out gradually in coming years, then will be repealed entirely for one year in 2010. After 2010, without a new law, the tax will be restored. Many nonprofit organizations worry that permanent repeal of the tax would eliminate a powerful incentive for wealthy donors to make charitable bequests.

As he has done for the past several years, Mr. Bush proposed a package of tax incentives designed to spur charitable giving. Among the proposals in the $7.8-billion package of tax breaks affecting charities:

• Allow people age 65 or older to make charitable donations directly from their individual retirement accounts without paying income taxes on the donated amounts. Estimated cost to the federal treasury, according to Mr. Bush: $102-million in 2007; $4.7-billion over 10 years.

• Extend to all companies the tax deductions now available to certain types of businesses that donate food to food banks. The proposal also would increase the value of the deduction. Estimated cost: $44-million in 2007; $1.3-billion over 10 years.

• Lower the federal excise tax on private foundations to 1 percent. Foundations currently must pay an excise tax of up to 2 percent on their investment income. Foundations say that lower taxes would enable them to give more money to charities. Estimated cost: $56-million in 2007; $1-billion over 10 years.

• Require charitable remainder trusts that earn unrelated business income to pay a 100-percent excise tax on that income. Currently, charitable remainder trusts that earn any unrelated business income lose their federal tax exemption on the entire trust during the year in which the income was earned.

The administration says its proposed change would be sufficient to discourage such trusts from investing in business unrelated to the charity's mission, without taking the harsher step of removing the tax exemption. The administration estimates that the change would cost $1-million in 2007 and $62-million over 10 years.

It is unclear how much of Mr. Bush's budget plan Congress will approve. Last year, lawmakers cut 87 of the 154 programs that Mr. Bush had proposed for reduction or elimination. So far, they have failed to pass any of the charitable tax incentives the president has proposed, although some charitable tax incentives, including the one affecting individual retirement accounts, are included in a tax bill bill the Senate voted on last week.

Negotiators from the Senate must now meet with House lawmakers to resolve differences between their bill and the House version, which did not contain any tax incentives.