Bush Proposes Tax Breaks to Stimulate Giving — and Urges Cuts in Several Key Federal Programs for Charities

By Elizabeth Schwinn

The $2.9-trillion budget that President Bush proposed to Congress on Monday would seek to stimulate charitable giving by permanently extending an array of tax incentives, such as a law that encourages older Americans to give money in their retirement accounts to charity. But it also would cut many federal programs on which charities rely.

The administration urged Congress to make permanent a new law that allows people older than 70 1/2 to donate up to $100,000 a year to charity directly from their individual retirement accounts, as well as another tax break that encourages landowners to conserve environmentally sensitive property. Both incentives, which are popular with charities, will expire at the end of 2007 unless the House and Senate take action.

However, many charities that count on federal aid would be harmed by President Bush's budget. For example, the administration proposed a $2.4-billion reduction in spending on community and regional development grants, which cities and states distribute to nonprofit organizations, and he would reduce spending on the Medicare and Medicaid, federal health care programs for the elderly and the poor, by $101.5-billion over the next five years. Mr. Bush also would decrease spending on a program that helps people pay their heating bills, by 18 percent, to $1.5-billion.

Mr. Bush also singled out 141 programs for elimination or steep cuts, a move that he said would save the government $12-billion over five years. Among the programs that would be cut: subsidies for vocational and technology education as well as for a program that provides meals to more than 400,000 needy elderly people.

If approved by Congress, such changes could mean that tens of thousands more Americans would be forced to seek charities' assistance in receiving help with health care, food, and other needs. But whether Congress will approve the cuts is an open question. Lawmakers have resisted many of the same proposed spending cuts in the past.

Mr. Bush said the reductions were needed to make money available to help balance the federal budget by 2012, and to pay for his plan to send more troops to Iraq.

Not all charities would face cuts in federal support under the president's plan. Mr. Bush sought increases in spending on some health-care programs. For example, he has requested that Congress provide money for 340 new or expanded local health-care clinics for low-income Americans. He also asked lawmakers to approve a $50-million increase in grants to organizations that provide assistance to homeless people, a $20-million increase to nonprofit groups that help develop "sweat equity" home ownership programs, and $4.2-billion for a global program to fight HIV/AIDS, more than double the $1.9-billion the United States is expected to spend on the program this year.

Retirement Gifts

Charity fund raisers have worked for years to persuade Congress to pass the retirement-account proposal, which became law in August and allowed donors to make gifts from their retirement accounts in 2006 and 2007 without incurring any penalty fees or new taxes. But many nonprofit officials have been hoping that Congress would make the provision even more generous in future years, both by increasing the maximum amount donors are allowed to give from their accounts each year and by broadening the types of groups that can receive such gifts. Under the August law, retirement money can't go to donor-advised funds, which allow people to put money into an account, get an immediate tax break, and distribute the money over time to the charities of their choice.

But the cost of expanding the provision is likely to make lawmakers queasy, given the federal deficit. Mr. Bush estimated that his proposal would cost $120-million in 2008, and $1.9-billion over 10 years, so an expanded version would be far more costly.

The conservation tax breaks cost somewhat less. Mr. Bush said making them permanent would cost $48-million in 2008; $265-million over 10 years.

Among the other tax proposals affecting charities, foundations, and donors that Mr. Bush proposed:

• Make permanent a law that allows any business to deduct extra for food that they donate to food banks and other charities. Current law expires at the end of the year. Estimated cost to the federal government: $44-million in 2008; $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: $61-million in 2008; $1.2-billion over 10 years.

• Make the repeal of the estate tax permanent. Under current law, the estate tax will be phased out gradually over the next few 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.

The President's request covers spending in the 2008 fiscal year, which begins October 1, 2007.

The Chronicle will provide more detailed coverage of President Bush's spending plan — and its impact on the nation's charities — in its February 22 issue, which will be available online February 19.

Brennen Jensen contributed to this article.