Monday, March 2, 2009
As demonstrated last week by the exchange between Professors Colombo and Dale , the nonprofit community is divided over the impact of President Obama's proposal to limit the charitable contribution deduction. OMB Director Peter Orszag even weighs in on the proposal in this OMB blog post entitled "The Budget and Charitable Donations."
Will this hurt charities?The evidence suggests that many factors affect charitable contributions, including the desire to help the charity and overall economic conditions. (The most recent example with changing the tax code illustrates that point. Between 2002 and 2003, the top income tax deduction for charitable contributions was reduced from 38.6 percent to 35 percent – and yet individual charitable contributions rose, presumably because other factors were a more important influence on giving than the change in the income tax.) Furthermore, about 75 percent of overall contributions would not even be affected by the proposed income tax change – because the contributions come from individuals who would not be affected or from corporations or foundations not subject to the individual income tax. Finally, even to the extent that charitable contributions are affected by tax considerations, the budget contains other proposed changes (including retaining an estate tax) which will create stronger incentives for giving. Above all, though, the best way to boost charitable giving is to jumpstart the economy and raise incomes – and the purpose of the Recovery Act enacted earlier this month was to do precisely that.
More evidence of the debate appears in this week's Chronicle of Philanthropy story discussing the reaction amongst nonprofit sector stakeholders:
Independent Sector, the Partnership for Philanthropy Planning (formerly known as the National Committee on Planned Giving) and other nonprofit groups say that limiting the charitable deduction would put a damper on contributions, especially given the bad economy. Even though administration officials have sought to reassure charities that the economy will be better by 2011 when the provision would take effect, some charity leaders think financial conditions could still be rocky.
. . .
But some experts believe concerns about the economic impact of lowering the charitable deduction are exaggerated, and the actual effects of the provision on giving by the wealthy would be relatively modest. “Every time people want to fool around with the tax code, [charities] say it will be the end of philanthropy,” said Bruce Flessner, a Minneapolis fund-raising consultant. “I don’t think it will kill giving.” Using 2006 tax data, the most recent available, Indiana University’s Center on Philanthropy has estimated that giving by high-income households would have been 4.8 percent less if President Obama’s proposed limits on charitable deductions, and increases in taxes owed by the wealthiest Americans were in effect then. Given this analysis, “we feel this budget proposal would not have much effect on whether people give but rather how much they give at the margins,” said Patrick Rooney, the center’s director of research. However, the center said that changes in personal income and wealth, including the condition of the stock market, affect giving more than tax proposals. It noted that every time the stock market declines by 100 points, giving declines by $1.85-billion.
I tend to agree with Professor Colombo's initial point, implicitly if not explicitly made, that no matter what the President and Congress do there will be opportunities for endless nit-picking (in fact, "nit-picking" is probably not the right word because the objections are all quite legitimate). I just think its the tax law equivalent of the NIMBY principle. There is great irony in the whole thing. Nonprofit stakeholders are "redistributionist" as a general matter but now that there is a proposal on the table that might reduce a subsidy that applies to them, suddenly the familiar arguments utilized by those who are strictly non-redistributional are adopted by those same nonprofit stakeholders. But the stock market is sinking like a heavy rock as we speak and we should probably agree not to let the perfect be the enemy of the good. Indeed, every argument made for or against the charitable contribution limitation can be made with regard to every other tax proposal. We need only change the code section to which the arguments are intended and insert whatever other code provision with which we agree or disagree.