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Brian Gallagher

Brian Gallagher

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Charitable Deduction Cap Is Ill-Advised

Posted: 02/17/11 02:27 PM ET

The President's budget proposal seeks to limit a vital incentive for charitable giving, the charitable deduction in the federal tax code.

It's understandable that Congress and the Administration are committed to reducing the deficit, with the financial integrity of the United States being at stake. They are competing to find cuts to all manner of programs, many of which provide assistance to children and low-income families.

At a time when unemployment remains high, our nation's most vulnerable families need more help, not less. States can't fill the gap and most are cutting their human services budgets. As a result, more and more people are turning to charities for assistance.

Thus, any change to the federal tax code that undermines charitable giving is a bad idea. The proposal to cap the charitable deduction is effectively a tax on charities, which puts the burden of deficit reduction or fixing the Alternative Minimum Tax (AMT) on those at the bottom of the economic spectrum. That includes the 52 million people served each year by United Way-funded programs. United Way works to advance the common good in the key human services areas facing government cuts: education, income and health. The tax code allows United Way and other charities to engage in this critical task.

The President argues that capping the charitable deduction is a way to ensure that the wealthy pay their fair share. But our experience is that wealthy individuals give generously and they readily accept their civic responsibility through contributions to charity. Their corresponding deductions are simply equal to their tax rate.

Our current federal tax laws ensure that anyone who itemizes will not be taxed on income donated to those in need. To be truly fair, even non-itemizers would be eligible for tax deductions based on their tax rate. When tax rates for various income brackets increase or decrease, the deduction rates would increase or decrease accordingly.

America has long been defined by an endearing and powerful characteristic -- its charitable spirit. However, people contribute to charity for a variety of reasons, including tax incentives. A recent study by the Center on Philanthropy at Indiana University concluded that a combined 67 percent of wealthy households would somewhat or dramatically decrease their charitable contributions if they received zero income tax deductions for their donations. If the charitable deduction is capped, rather than eliminated, the wealthy will still give. But they will give less, and charitable aid to those who need help will be reduced at the worst possible time.

As government programs are cut, the Administration and Congress should be looking for ways to increase charitable donations. Fortunately, Congress has not seriously considered previous efforts to cap charitable deductions. We hope Congress will continue to support charities, as we are often the last resort for financially distressed individuals and families.

The proposed cap would hurt the very people who most need the help, and they should not unfairly carry the burden of fixing the AMT or reducing the deficit.