Tax reform puts charity on the chopping block

WASHINGTON—Rep. Paul Ryan, R-Wis., chairman of the House Budget Committee, this week released a report detailing much of what’s wrong with the U.S. government’s 50-year-old war on poverty: In 2012, the federal government spent $799 billion on 92 often duplicitous programs that sometimes do as much to keep people in poverty as they do to help them out.

“For too long, we have measured compassion by how much we spend instead of how many people get out of poverty,” Ryan said in a statement.

Charitable organizations have a much better track record of helping lift people out of poverty. For examples, see the winners and finalists for WORLD’s annual Hope Award for Effective Compassion. But many of those groups could face dwindling donations if Congress adopts a new tax reform proposal introduced last week. Rep. Dave Camp, R-Mich., chairman of the House Ways and Means Committee, unveiled a long-awaited plan to overhaul the tax code, and while some gave it positive reviews, charitable organizations say it could cost them billions in donations.

“I know Chairman Camp wants charitable giving to go up, [but] his discussion draft does not do that,” said David Wills, president of the National Christian Foundation (NCF). “It hurts charitable giving significantly.”

NCF is part of the Faith and Giving Coalition, which along with the Charitable Giving Coalition and other groups has been lobbying to preserve the current charitable deduction as part of tax reform. Nonprofit leaders who spoke with me this week applauded Camp for a strong proposal that preserves the charitable deduction—since some on both sides of the aisle wanted to do away with it. But they expressed concern over several specific provisions, especially the 2 percent floor on charitable giving, which the Congressional Budget Office in 2011 estimated would reduce charitable donations in the United States by $3 billion annually.

Under current law, any tax filer who opts to itemize can deduct charitable donations of any amount up to 50 percent of Adjusted Gross Income (AGI). Camp’s plan would only allow deductions above 2 percent and below 40 percent of a filer’s total AGI.

“They’re shrinking and shrinking and shrinking the pie of people that can basically use the deduction for charitable giving, and that’s not good,” Wills said. “We actually want to expand the number of people who can exclude charitable giving from their income.”

The plan also aims to dramatically reduce the number of people submitting itemized tax returns, primarily by increasing the standard deduction from $6,100 for single filers and $12,200 for married taxpayers filing jointly, to $11,000 and $22,000 respectively. According to a Congressional Research Service report released last month, 32 percent of all taxpayers itemized their returns in 2011—with 63 percent of those coming from filers who earned under $100,000. The Camp plan aims to get the total number of itemized returns down to around 5 percent.

“The incentives would still be there for your upper income individuals, but it seems to me it’s all been removed for lower and middle income givers,” said Robert Zachritz, vice president of advocacy and government relations for World Vision. “We know the main reason people give is not because of the charitable tax deduction, but the amount they give actually is dependent on the tax deduction.”

Camp’s stated goal has always been to simplify the tax code by consolidating seven tax brackets into two, but charitable organizations question whether simplifying is always a good thing. Leaders said the plan has so many moving parts, it’s difficult to predict how much giving would be affected. They believe unintended consequences are probably inevitable.

According to Giving USA, Americans gave a record $316 billion to charitable causes in 2012. The Joint Tax Committee estimates giving would increase by $2.2 billion under the Camp plan—likely from projected increases in disposable income—but it doesn’t specify how that money would come into the system. Most leaders who spoke with me said they just don’t see it.

“They’re assuming the bill would create very aggressive economic growth,” said Rhett Butler, government liaison for the Association of Gospel Rescue Missions, an organization with 275 members. “The bill would supposedly give people more discretionary income, but it repeals a ton of personal deductions. I think there are more things that will disincentivize than will incentivize giving.”

Among other concerns, the Camp plan would limit deductions on donated property to the purchase price, rather than fair market value, and it would extend the window to claim charitable deductions through the date a person files a return. While the extension was painted as a positive, Butler said rescue missions think it’s a “terrible idea,” since December donations account for 22 percent of their yearly revenue. He said extending the deadline would require more tracking and have a disruptive effect on donors’ giving habits.

“Any kind of changing of timing makes confusion rampant in the giving process,” said Tom Laymon, who heads Sunday Breakfast Mission in Wilmington, Del. “For any of us, we live and die by giving, and we really need for the government not to make it harder for our donors to give.”

Camp’s tax reform proposal is the result of three years of work, including collaboration with the Senate Finance Committee. The plan is not expected to go anywhere this Congress, but it likely will be used as a benchmark for future negotiations. The nonpartisan Joint Committee on Taxation projected the proposal would create 1.8 million jobs, and the average middle-class family of four would gain about $1,300 per year.

As tax reform talks continue, nonprofit groups plan to keep making the case for preserving the charitable deduction’s full value. It appears they have a significant force of allies in Congress. In late January, 33 senators—17 Democrats and 16 Republicans—wrote a letter urging the top Democrat and Republican on the Senate Finance Committee to keep the charitable deduction as part of tax reform.

“It is the only provision that encourages taxpayers to give away a portion of their income for the benefit of others,” the lawmakers wrote. “[I]t is not a loophole, but a lifeline for millions of Americans in need.”

Sen. Ron Wyden, D-Ore., co-authored the letter, and in February took over as the Finance committee chairman when Sen. Max Baucus, D-Mont., became U.S. ambassador to China.

Listen to J.C. Derrick discuss the income tax overhaul plan on The World and Everything in It: