Would candidates’ proposals affect charitable giving?
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Would candidates’ proposals affect charitable giving?

Charities fear effects of capping tax deductions

Politician: Spare that charitable deduction.

That’s the message from a pair of letters sent to President Barack Obama and Governor Mitt Romney by a coalition of nonprofit organizations that includes the Jewish Federations of North America.

One letter addresses Governor Mitt Romney’s proposal to cap itemized tax deductions at $25,000. It warns that “Any proposed cap would have long-range negative consequences on the charitable organizations upon which millions of Americans rely for vital programs and services.”

The other letter criticizes President Barack Obama’s proposal to reduce the amount of the charitable deduction available for individuals earning more than $200,000 or families more than $250,000 by up to 25 percent. Under the proposal, high-income taxpayers would receive no more reduction in taxes for their donation than do taxpayers in the 28 percent tax bracket. Taxpayers in the 35 percent tax bracket would pay a 7 percent tax on their contributions – the difference between their rate and the 28 percent they would be allowed to deduct.

This means that someone earning more than the income limit who donated $1,000 would reduce his tax bill by $280, rather than by the $350 now allowed.

Obama has proposed this change repeatedly during his term, most recently in his latest budget proposal. His attempts to raise revenue through this modification to tax deductions have been met repeatedly with protests from the nonprofit community. They also have been rejected by Congress.

Would this reduction of tax deductibility by 20 percent really affect charitable giving?

In a 2009 press conference, Obama defended the proposal, saying, “There is very little evidence that this has a significant impact on charitable giving.

"I think it is a realistic way for us to raise some revenue from people who’ve benefited enormously over the last several years. It’s not going to cripple them."

That year, more than 100 Jewish organizations signed a letter opposing the proposal.

The American Jewish Committee’s executive director, David Harris, wrote an open letter to the Obama administration’s budget czar, Peter Orszag, estimating that the provision could cause a 20 percent decrease in giving among the $250,000-and-up set.

“As most nonprofits derive 70 to 80 percent of their donations from a small proportion of donors who are major givers, this proposal will deal a destructive blow to many charities,” Harris wrote.

In 2012, the Orthodox Union issued a statement protesting the resurfacing of the proposal, saying that the change could reduce donations to American charities by $4 billion annually.

But where Obama’s proposals would tweak the charitable tax deduction, the Romney proposal effectively would end it, both for big givers – for whom any gift above $25,000 would receive no tax write off whatsoever – and for middle income families living in high-tax states with high property values. The two leading itemized deductions, other than the charitable deduction, are local taxes and the mortgage interest deduction. Between property taxes and mortgage payments, it is not uncommon for residents of northern New Jersey to have itemized deductions nearing $25,000 even before charitable donations are taken into account.

Romney proposed a cap on deductions as he came under pressure to prove that his proposed tax cut would be revenue neutral. Romney has proposed a 20 percent tax cut, while promising that it would not increase the deficit. He has variously said that it would and that it would not disproportionately benefit the most well-to-do. Analysts have said that the cost of the tax reduction would be around $5 trillion over a decade. The nonpartisan Tax Policy Center estimated that the cap on tax deductions would raise only $1.3 trillion in new revenue.

In the policy section of his campaign web site, Romney offers no details on how he would make up for the deficit, other than a general promise to broaden the tax base and a claim by four economists that his reform plan “will increase GDP growth by between 0.5 percent and 1 percent per year over the next decade.” One of those economists famously predicted in 1999 that the Dow Jones stock index soon would rise to 36,000. (At its 2007 peak, the index was slightly above 14,000.)

The letter to Romney signed by the Jewish Federations emphasized that charitable donations might bear the brunt of any impact from capping deductions.

“[C]haritable giving is probably a lot more sensitive to tax changes (in economics jargon, more price elastic) than payments of local taxes and mortgage interest. Most taxpayers can do little in the short run to affect local taxes (by changing jurisdiction or through political pressure) or mortgage payments (by buying a smaller home or paying down debt), while charitable contributions can usually be adjusted with ease,” said the letter, quoting Martin Sullivan, chief economist at Tax Analysts.

Other than signing the letters along with a wide swathe of nonprofit organizations, among them the United Way and the Salvation Army, the Jewish Federations of North America has been quiet in the wake of Romney’s proposal, as have the groups that rallied against Obama’s smaller measures. Nonprofit groups are wary of appearing partisan – and risking their nonprofit status – during an election season. They also are wary of alienating potentially partisan donors. Asked to comment for this story on Tuesday night, William Daroff, who heads the Jewish Federations’ Washington office, replied: “Happy to talk a week from tomorrow.”

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