U.S. lawmakers are considering changes to the tax deductibility of charitable contributions, scrutinizing a benefit that is expected to allow 38.7 million households to claim a deduction for 2012.
Possible changes would include imposing a dollar cap on all itemized deductions, limiting the tax rate at which contributions can be deducted and replacing the deduction with a credit.
“We want to ensure that whichever policies we ultimately decide to pursue are crafted in a way that makes the tax code simpler, fairer and easier to comply with,” said Representative Dave Camp, chairman of the House Ways and Means Committee, which is holding a hearing today on the subject. “We want to hear from this community before considering proposals.”
The 96-year-old deduction has come under scrutiny as lawmakers in both parties look for ways to broaden the tax base, either to lower rates or reduce the budget deficit. President Barack Obama has proposed limiting the deduction’s benefit for those in the top three tax brackets.
Critics of the charitable tax break note that it benefits only the one-third of taxpayers who itemize their deductions, particularly those with the highest incomes who can donate the most.
Top 20 Percent
In 2015, 82.3 percent of the tax benefit from the deduction will go to the top 20 percent of taxpayers, and about half of that will go to the top 1 percent, or those making more than about $573,000, according to the nonpartisan Tax Policy Center in Washington.
Camp, a Michigan Republican, wants his committee this year to approve a rewrite of the U.S. tax code that would lower rates and curb some tax breaks.
Nonprofit executives from across the country testified at the hearing, maintaining that the deduction differs from other breaks and noting the work their groups do to reduce poverty. They warned that limits on the deduction would reduce giving.
“The charitable deduction and its encouragement of charitable giving is hardly a loophole or a benefit for the rich,” said Kevin Murphy, president of the Berks County Community Foundation in Reading, Pennsylvania, and chairman of the board of directors of the Council on Foundations Inc. in Arlington, Virginia.
“We cannot allow ourselves to lose sight of the fact that the person who benefits from those charitable gifts isn’t the donor,” Murphy said. “It’s those hungry children.”
Representative Jim McDermott, a Washington Democrat, said he wondered about the purpose of the hearing, which he said was scaring charitable groups.
“Is it that we’re softening them up for the fact that they’re going to get clipped?” he asked, while also questioning whether Republicans plan to leave the deduction alone.
Camp said he was approaching the issue with an “open mind” and might look at changes that would make the tax code simpler.
Eugene Steuerle, a fellow at the Urban Institute in Washington, said that allowing deductions only for contributions that exceed a set amount or percentage of income would be an alternative to the current rule, which allows deductions for many gifts that would be given anyway.
One way to increase giving, he said, would be to allow taxpayers to take deductions through April 15 of the following year so they could instantly see the effect of benefits when they are preparing their taxes instead of having a lag between the donation and the tax benefit.
Lawmakers should consider limits on noncash contributions of property because of the difficulty of enforcing rules and valuing property, said Roger Colinvaux, a law professor at Catholic University in Washington.
“The costs are high,” he said. “Unfortunately, the benefits although very real are difficult to assess.”