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When to Trim the Charitable Tax Deduction

The Senate Finance Committee wrote an open letter last month to the rest of the Senate calling for tax code reform suggestions. The due date for proposals was this past week. Among other parts of the code, the charitable tax deduction faces potential overhaul.

Under the current code, people who make the most money get the largest tax breaks when they give to charity. Those who earn more than $250,000 per-year can deduct as much as 39.6 cents on every dollar they give. Middle-income people can only deduct between 10 and 15 cents.

Obama has proposed limiting all deductions for people in the highest tax brackets to 28 cents on the dollar. 

This plan has struck a deep chord of anxiety among nonprofit leaders. They speak as though we’ve reached a delicate agreement with our country’s financial elites to donate as much money as they do; we can’t afford to ruffle them.

This is not an abstract concern. When nonprofits get hit, the shock travels directly to poor people who depend on these organizations for vital basics like food and shelter. Museums, universities and hospitals feel it as well.

Deduction cap supporters counter that the plan would only minimally dampen charitable giving. By one estimate, the cap would reduce giving by somewhere between 1.6% and 3%. By another, donors would pull $820 million during the first year after the cap’s enactment and an additional "$2.43 billion in Year 2 when existing tax breaks expire."

For perspective, Americans gave a total $316 billion to charity in the last year, Giving USA has reported.

Supporters also suggest that we tend to overestimate nonprofits’ dependence on charitable giving among other revenue sources. Though the degree of reliance varies among organizations of different types, Roger Colinvaux says donations equate to “about 13 percent of total revenues for the sector in the aggregate.”

Congress needs to be careful when it comes to the nonprofit sector; it's already straining to fill the gaps left by government cutbacks. But here's a rule of thumb for trimming back the charitable deduction: This is reasonable to do as part of a plan to increase tax revenues and ensure that government programs are sustainable. It's less defensible as part of revenue-neutral tax reform or plain deficit reduction.