Charities now know how Phil Connors felt in the 1993 film "Groundhog Day". For the fifth straight fiscal year the president's budget proposal includes a cap on deductions for charitable giving. This is actually anything but new, and in fact just more of the same.
But if you are a charity, this Groundhog Day budget proposal is even worse than previous iterations. This time we are in a post-fiscal cliff environment, complete with higher taxes, which will mean that caps on deductions and other proposals will harm charitable giving even more than they otherwise would have.
In the "deju vu on steroids" category, the Obama administration in various forms has proposed capping itemized deductions at 28 percent, more than six times.
In each case such a cap would have cut deductions for the top earners by 20 percent and would have hurt giving. Each previous proposal would have resulted in private individuals cutting their cumulative contributions of needed aid to charities by billions in dollars.
Now amplifying these effects is the fiscal cliff agreement, which raised taxes for top earners to 39.6 percent, while other taxes (including the payroll tax, Obamacare taxes, capital gains taxes and even changes to the estate tax) have gone up across the board for all earners, all while the cost of living certainly hasn't decreased. The double whammy of these new taxes, which reduce discretionary income to start with, combined with the proposed 28 percent cap on the charitable deduction, would further increase the cost of any gift and mean reduced giving to the charities and volunteer operations on which so many depend.
Since the recession, the demand for charitable services has risen dramatically. Many charities report that they are now serving needy individuals who were once donors and volunteers. Most of the discussion around cutting, capping or limiting the charitable deduction is centered on paying for increased government spending or taking in more revenue for deficit reduction. Of all the ideas to increase government spending or reduce the deficit, doing so on the backs of charities has to be one of the worst.
President Obama keeps proposing these bad policies despite having heard repeatedly from both the charitable community and everyday Americans that they are opposed to these limitations on giving. Perhaps the president is emboldened by the recently passed Senate Democrats' budget, which also puts the charitable deduction on the table. That budget calls for raising nearly $975 billion in new revenue, and suggests that "this could take the form of a limit on the rate at which itemized deductions and certain other tax preferences can reduce one's tax liability, a limit on the value of tax preferences based on a certain percentage of a taxpayer's income, or a specific dollar cap on the amount of allowable deductions."
The administration and others who seek to limit the charitable deduction are failing to consider three basic points:
• The charitable deduction is different from all other deductions. While other tax incentives are meant to benefit the taxpayer, the charitable deduction reflects the social benefit that accrues from a person giving away their money to legitimate charitable purposes. The tax savings from a person's deduction is still far less than the value of the entire dollar that is given away.
• One gets the feeling that for this administration there are two economies of which they recognize only one: the public one, in which government creates government or government-beholden jobs, "invests" in projects the private market knows better than to touch, or provides assistance through government programs. But in fact it is the private economy that is the more important, where jobs that actually increase productivity are created, where investments that are worth making procure capital, and where a voluntary sector far more efficiently, effectively, and responsively delivers much needed services. Our private voluntary associations and charitable initiatives are one of the great hallmarks of American society, and depend both on a healthy economy, unimpeded giving, and a firewall between charity and the government in order to flourish. The president may have faith that government poohbahs with thousands of pages of rules will solve American's problems, but the rest of us have greater faith in America's traditional independence in pursuing private solutions to society's challenges.
• Any cuts, caps or limits to the charitable deduction, absent serious tax reform, will reduce giving. This is an indisputable fact and an unhealthy eventuality to all but those who want every greater numbers dependent on government and its largesse. For the rest of us, however, the last thing charities need right now is a reduction in private resources when they are already stretched thin; the last thing we as a society need is a shriveling of the most effective delivery of compassion and assistance we have.
Year after year we see the same proposals out of this administration. One can only hope the White House will snap out of this Groundhog Day spell and -- like Phil Connors -- finally get it right by supporting charity and philanthropy through its proposals rather than just through its rhetoric.
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