Donations, deductions and the deficit

Area and national business people describe their dedication to charitable giving as deeply personal, strategic and unwavering.
By Michelle Singletary
Washington Post Staff Writer
Saturday, November 20, 2010; 6:20 PM

If indeed it is better to give than to receive, then there should not be much criticism from givers if the charitable tax deduction is reduced as the government tackles the budget deficit.

But maybe the not-so-altruistic truth is that many people do give to charity because they get something in return. Since 1917, our tax code has allowed individuals who donate to charitable and certain other nonprofit organizations to receive a tax deduction for their gifts. The deduction, for those who itemize, can be a great incentive for donations. However, it comes with a cost to the federal bottom line.

As we look for ways to reduce the amount of debt our government is taking on, many things we've come to expect may be put on the chopping block. The co-chairs of the National Commission on Fiscal Responsibility and Reform, President Obama's deficit reduction panel, have proposed a number of controversial cuts.

They want to repeal deductions for state and local taxes and to limit mortgage deductions to exclude second residences, home-equity loans and mortgages over $500,000. And they have recommended limiting the charitable deduction to 2 percent of a taxpayer's adjusted gross income.

The co-chairs are Erskine Bowles, White House chief of staff under President Bill Clinton, and Alan K. Simpson, a former U.S. senator from Wyoming. Bowles and Simpson say their cuts would reduce the deficit by almost $4 trillion through 2020. They boast that the 50-plus budget cuts they've come up with would eliminate "outdated programs and strengthen competitiveness by making Washington cut and invest, not borrow and spend."

Already, the darts are flying.

Bowles and Simpson said the proposed cuts are their ideas alone, and they've acknowledged that their tough suggestions probably won't be adopted by a majority of the commission's 18 members when the full panel issues its recommendations Dec. 1.

In hopes of muting some of the criticism, Obama said this about the Bowles-Simpson suggestions: "Before anybody starts shooting down proposals, I think we need to listen. We need to gather up all the facts."

Obama took quite a hit last year when a provision in his budget called for limiting to 28 percent the tax rate at which high-income taxpayers - those making more than $250,000 - could take itemized deductions for charitable donations.

Critics said that if you reduce the deduction, people won't give as much.

However, the Center on Philanthropy at Indiana University found that reducing the tax deduction would have a relatively small negative effect on itemized charitable giving. The center estimated that if the deduction cut had been in effect in 2006, which is the latest year for which data are available, total itemized charitable giving by households would have dropped 2.1 percent. Total itemized giving by the high-income households would have declined 4.8 percent, or a drop of $3.87 billion.

The Center on Budget and Policy Priorities came to a similar conclusion but went further by pointing out that a large portion of charitable giving derives from foundations, estates, and corporations and from individuals who do not itemize their contributions on their tax returns. Itemized contributions represent 62 percent of total charitable giving.

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