Thursday, November 11, 2010

Obama's Debt Panel and Tax Benefits for Charities

The National Commission on Fiscal Responsibility and Reform released its draft CoChairs' Proposal in the form a 50-slide PowerPoint presentation and a 24-page illustrative savings list totaling $200 billion in 2015.  With tax reform as one of the five basic recommendations made, and no apparent sacred cows, it is not surprising that the current tax benefits enjoyed by charities are among the many targeted tax provisions.  Here is how the three proposed tax reform options would affect those benefits:

  • Option 1 (The "Zero Plan"):  Would eliminate all tax expenditures or, alternatively, preserve only a few such tax benefits in exchange for higher marginal rates.  Using the most recent Joint Committee on Taxation Tax Expenditures List (from January of this year), eliminated provisions would include not only the charitable contribution deduction but also tax-exempt bonds, low-income housing credits, and other tax benefits that charities commonly use to advance their mission, such as the exclusion of scholarship and fellowship income, numerous other education-related tax benefits, the credit for rehabilitation of historic structures, the exclusion of certain foster care payments, and similar benefits.  With respect to other types of nonprofits, the list also includes tax exemption for credit union income.  And this summary does not include those benefits not unique to nonprofits that are nevertheless utilized by them, such as the exclusion from gross income of employer-provided health insurance.
  • Option 2 ("Wyden-Gregg Style Reform"):  Would modify the charitable contribution deduction by establishing a 2 percent AGI floor.
  • Option 3 ("Tax Reform Trigger"):  Would create an across-the-board "haircut" for all itemized deductions as well as certain other tax benefits if reform not enacted as of 2013.  The size of the haircut would be set at a level sufficient to reduce the deficit by $80 billion in 2015, which roughly translates in about a 15% reduction in such deductions, including the charitable contribution deduction.  This proposal would also require the haircut to increase over time in the absence of comprehensive tax reform.

The list of illustrative savings also has some items of interest to nonprofits, including the proposals to have the Smithsonian start charging fees and to eliminate Corporation for Public Broadcasting funding.

These proposals only represent the views of the co-chairs, former Senator Alan Simpson and former Clinton Chief of Staff Erskine Bowles.  The final Commission report is due to be released no later than December 1, 2010, but it must receive the approval of at least 14 of the Commission's 18 members.


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