In 2009, Americans reported nearly $34.9 billion dollars worth of donations to private charities serving the public on their federal tax forms. Of all these donations, $19.14 billion dollars, or 54.9%, were made by taxpayer households that reported $200,000 or more in annual income. Prior to his new “jobs” initiative, President Obama went after the charitable contribution tax deduction in his original budget proposal for the fiscal 2012 year. Mr. Obama is looking to reduce the charitable tax deduction for taxpaying households with an income above $200,000. To compound matters, one of the recommendations of the President’s National Commission on Fiscal Responsibility and Reform is to eliminate the deduction for charitable contributions in its entirety.
Charities warn that reducing or elimination the deduction will cause irreparable damage to the nonprofit sector. These charities claim that the proposed changes come at a time of sustained and severe declines in donations due to the recession and cuts in government contracts for nonprofits. Estimates of how much the charitable deduction costs the government are sketchy at best. The one that most policy makers rely on is calculated by Congress’s Joint Committee on Taxation, which estimates that the government will lose roughly $237 billion dollars to the charitable deduction from 2009 through 2013.
Congress passed the income tax deduction for charitable contributions in 1917. The purpose of the deduction was to promote private donations to nonprofit institutions. With talk now of overhauling the federal income tax in favor of a simple, flat tax, many proponents of a flat income tax call for retaining the charitable deduction as part of any flat tax proposal. Retaining the charitable deduction as part of a flat tax carries with it several consequences, all of which hinder the underlying goal of a flat tax: to make the federal income tax system fairer and less intrusive by taxing all income only once and at its source.
Many analysts believe that elimination of the charitable tax deduction would decrease significantly the amount of money donated to nonprofits. This assumption is based on the primary driving force behind charitable donations is the income tax deduction. But focusing on this price effect to the exclusion of all other factors is like saying that the only reason people purchase a house is to take advantage of the home mortgage income tax deduction. Some 46 million Americans households, however, give to charities but do not claim an income tax deduction. Non-itemizers account for roughly 64% of all donors.
With the federal government struggling to regain control over the nation’s deficit, nothing seems to be sacred anymore. Most people agree that something has to be done with our present outdated federal income tax system. The current federal income tax system is effectively regressive due to the numerous tax loop holes and ridiculous complexity which makes it ripe for abuse. I don’t think that anyone can say with any certainty what will happen should charities see the elimination of this 94 year old deduction, but I suspect we will see change. That much is for certain.