Charitable organizations, particularly arts groups and universities that rely on high-income donors, would suffer under Mitt Romney’s tax policy.
The Republican presidential candidate has proposed repealing the estate tax and imposing still-unspecified limits on top earners’ deductions while lowering their rates. Each of those changes would make it more expensive to donate money to charities.
“How can we possibly do our work if we are disincentivized?” said Diana Aviv, president and chief executive officer of Independent Sector, a Washington-based coalition of nonprofits whose members include Catholic Charities USA and the Robert Wood Johnson Foundation. “We are interfering with a century-old tradition.”
Museums, medical researchers and food banks have their livelihoods at stake in the 2012 election, in what would be one of the most significant changes to tax incentives for charities since Congress allowed the charitable deduction in 1917. Both presidential candidates are pitching ideas that would shrink such incentives for giving to charity, prompting objections from nonprofits.
“A huge portion of charitable giving is purely altruistically motivated and it’s also hugely motivated by wealth,” said Jon Bakija, an economics professor at Williams College in Massachusetts. “You change the tax incentive, it changes how much people give. So people respond to that, too.”
Price of Giving
For every percentage-point increase in the expense of giving to charity, contributions shrink by 1 percent, according to a 2011 paper that Bakija co-wrote.
With Romney’s proposed 20 percent rate cut, because people couldn’t deduct as much, the price of giving for people in the top tax bracket would rise by 10.8 percent. That suggests an equivalent drop in donations even before considering the estate-tax repeal and limits on deductions.
Romney, who has said his simpler tax system with lower rates would boost economic growth, has talked generally about how he would broaden the tax base. Last week, he floated an idea to cap all itemized deductions at $17,000. In the Oct. 3 debate against Obama he suggested a $25,000 or $50,000 cap.
“Anybody can have deductions up to that amount,” Romney said. “And then that number disappears for high-income people. That’s one way one could do it.”
‘The High End’
In an interview yesterday on CNN, Romney said some tax preference for charitable donations would remain. He said tax breaks for “people at the high end” would be reduced “pretty substantially.”
Almost all U.S. taxpayers in the top 1 percent itemize deductions, and that group deducts an average of $173,670 a year, according to the non-partisan Tax Policy Center in Washington. About 78 percent deduct more than $50,000. Anyone with donations exceeding the cap would have no tax incentive to make charitable contributions, Bakija said.
For donors thinking of “endowing a chair or building a gallery for a museum, it’s going to be all the donor’s money, not any of Uncle Sam’s money,” said Clint Stretch, who retired in June as a tax principal at Deloitte Tax LLP in Washington. “At the margin, that’s going to affect decision-making.”
Romney, who typically gives 10 percent of his income to the Church of Jesus Christ of Latter-day Saints, would be affected by a cap on deductions. In 2011, Romney claimed $4.7 million in itemized deductions on $13.7 million in adjusted gross income, according to tax returns he released. That doesn’t include another $1.75 million in contributions that Romney didn’t deduct so his tax rate would exceed 13 percent.
Even under a cap, an incentive would remain for taxpayers whose deductions exceed the standard deduction -- $11,900 in 2012 for a married couple filing jointly -- and are less than the cap.
Charities might be hurt by a cap because their break is the most discretionary of the major itemized deductions. Taxpayers lock in mortgage interest with multi-year contracts. They have no choice about paying state and local income and property taxes.
As a result, people earning about $150,000 or $200,000 a year may give less or spread out their contributions, Stretch said.
“Instead of giving $10,000, their accountant may tell them: ‘Give $3,000 a year for three years,’” he said.
Charles Schwartz, a financial analyst and accountant living in Monroe, Connecticut, said high property and income taxes there, along with mortgage interest, would put his family over a $17,000 deduction cap.
“We would not make any charitable contributions if the Romney plan were implemented because we could not deduct them,” said Schwartz, 61. “Or, if we did make any contributions, they would be much less than we used to make.”
Romney is proposing federal spending cuts that could affect funding for nonprofit groups in such areas as education and health.
President Barack Obama also has drawn the ire of charitable groups with a plan that would have a more limited effect than Romney’s. Since 2009, he has been pushing to cap the charitable deduction along with other breaks. He would change the top rate to 39.6 percent and then let people deduct as if they were in the 28 percent bracket.
“I can’t believe that the mess this country is in is going to be solved by balancing the deficit on the back of charitable giving,” said Eileen Heisman, president and chief executive officer of the National Philanthropic Trust, a Jenkintown, Pennsylvania-based group that advises donors.
She warned both parties against “crippling the charitable sector” at a time when government agencies may have insufficient funds.
Charitable giving wouldn’t dry up under either candidate’s proposal. The 70 percent of tax filers who don’t itemize deductions fill church collection plates and pay PTA dues without getting tax breaks.
Also, about half of top earners would maintain their level of giving even if they couldn’t take any deductions, according to the early findings of a Bank of America study of high-net-worth philanthropy, scheduled to be released Oct. 30.
The study is based on responses from 700 households with annual incomes exceeding $200,000 or net worth of more than $1 million.
“Tax policy tends to influence the amount that donors give” and how they time and structure donations, not whether they give, said Una Osili, an economics professor and director of research at the Center on Philanthropy at Indiana University, which conducts the study with Bank of America. “Their own economic and financial circumstances are going to be the most important predictor of those giving levels.”
Amy Danforth, vice president of marketing for Fidelity Charitable, says donors are accelerating gifts because of concern about future tax policy. “They don’t know what’s going to happen, but they do know what the tax laws are this year,” she said in a telephone interview.
Donors’ “action mentality” is reflected in a sharp increase in Fidelity’s gifts this year. Through June 30, clients contributed $824 million to Fidelity Charitable, a 61 percent increase from $512 million donated in the same period in 2011.
Total charitable giving in the U.S. reached $298.4 billion in 2011, up 4 percent from 2010, according to the annual Giving USA report.
The charitable deduction matters only to the 30 percent of tax filers who itemize deductions and exceed the standard deduction. Itemizers tend to be concentrated at the top and donate more heavily to the arts, health and education.
“The deductibility for charitable contributions is a crucial inducement for generosity to religious, public service and cultural institutions nationwide,” Harold Holzer, senior vice president for external affairs at the Metropolitan Museum of Art in New York, said in an e-mailed statement. “Any threat to this longtime tax benefit could have disastrous results.”
Among high-income households, 71.6 percent give money to arts groups, compared with 7.8 percent among the general population, according to the 2010 version of the Bank of America study. Wealthier households are about five times more likely than the general public to give to education. Donations to religious groups or institutions are more evenly split, with 70.5 percent of those in the high-income group donating compared with 43 percent of the general public.
Romney’s proposal to repeal the estate tax would affect charitable giving, which can be used to reduce the size of a taxable estate. Bequests in 2011 totaled $24.4 billion, according to the Giving USA report, up 12.2 percent from 2010.
This year, the per-person exemption from the estate tax is $5.12 million, with a 35 percent top rate. Obama wants to drop the exemption to $3.5 million and raise the top estate tax rate to 45 percent.
Like Obama, Aviv’s group supports returning to the $3.5 million exemption and 45 percent rate that were in place in 2009.
“Since people had the option to give money to charity instead of paying the federal estate tax, paying Uncle Sam, they would do that,” she said.
Nonprofit groups have blocked Obama’s proposal in Congress, and they’ll continue talking to lawmakers, pushing the message that the deduction rewards people for giving more of their own money away in the public interest.
“We certainly are concerned,” said Brian Flahaven, director of government relations at the Council for the Advancement and Support of Education, which represents college fundraisers. “We’re working hard to encourage Congress and the administration to preserve the charitable deduction.”