News and analysis
August 04, 2010

New York Legislature Passes Plan to Limit Charitable Deductions for the Wealthy

Nonprofit organizations across the country are concerned a budget plan passed by the legislature in New York State limiting charitable deductions for “high earners” could catch on with other cash-starved state governments—and Congress—and cause a loss of significant contributions.

The New York plan would limit tax deductions for people who earn more than $10-million annually—about 3,500 taxpayers in the state. They would be able to write off only 25 percent of their charitable contributions on their state income taxes rather than the current 50 percent. The provision in the budget plan run for three years, including the current 2010 tax year.

The charitable-deduction provision could provide up to $100-million in revenue during the current fiscal year for the state, but charities think the change would lead many wealthy people to give less money to charity.

“This is a very dangerous road for New York to be going down in terms of sending a signal to the wealthy that we don’t value their philanthropy,” said Susan Hager, chief executive of United Way of New York State.

“It is unconscionable to be doing this at a time when the state has made spending cuts to human-service programs,” Ms. Hager said. “The state is now moving over to the other side of the ledger and interfering with the private fund raising that agencies need to survive. Not-for-profits in New York are getting whacked time and time again.”

New York nonprofit groups have an ally in their mayor, Michael R. Bloomberg, who said that the “law is about as ill-considered a piece of legislation as I can think of.”

“For a small amount of incremental revenue to the state, they will discourage, consciously or subconsciously, others from giving away money,” he said. “Whether or not other states will do this, it’s hard to see how other states could be so stupid. Hopefully we’re the only one.”

'A Very Attractive Target’

The action in New York could set an example for other states that are looking for revenue during the tough economic times, said Ms. Hager: “The larger set of issues will be: Where will we see this next?”

Tom Riley, vice president of the Philanthropy Roundtable, a Washington association of grant makers and philanthropists, said of states facing tough budget choices, “When they see very high-end donors with big incomes at this time—they are a very attractive target.”

Mr. Riley noted that the Hawaii State Legislature in April passed a tax bill that would have limited itemized deductions on state returns for high-income individuals, including deductions for charitable contributions, medical expenses, and mortgage interest.

Last month Hawaii Gov. Linda Lingle vetoed the measure. “Our community is still feeling the impacts of the recession, and this is the time when we want to encourage donations and contributions to charitable organizations, not enact laws that hinder them,” said Ms. Lingle.

Mr. Riley said that one reason the New York plan sets a “bad precedent for philanthropy is that it’s not just for all the effect it would have on this year’s donors but the effect on future donors as well. New fortunes come up, and some people still do well in economic bad times. If you make charitable giving a less attractive activity, you are going to see less of it.”

He added that the policy could have “very unfortunate long-term consequences.”

Federal Limit Sought

Officials of nonprofit organizations also expressed concern that passage of the New York provision could provide encouragement to members of Congress who are grappling with massive budget deficits and thinking of changing tax laws to find revenue.

In February, President Obama renewed a proposal he made last year to limit the value of charitable deductions for high-income taxpayers. The plan, which was not adopted by Congress a year ago, would limit to 28 percent the tax break couples that earn $250,000 (or individuals who earn $200,000) could get for their itemized deductions, such as charity gifts.

The White House said the change would raise more than $291-billion from 2011 to 2020.

Many nonprofit organizations pleaded with New York lawmakers to reject the proposal on charitable deductions or limit it to one year.

“As a result of a cap, some people will give less, and those who most need the help will be hurt,” said a statement signed by officials of more than two dozen organizations, including the United Way of New York State, the Orthodox Union, the New York Council of Nonprofits, and the Nonprofit Coordinating Committee of New York.