Deductions are in the cross hairs as Washington hunts for a big deal to avert tax increases and spending cuts, and after years of successfully fending off such efforts, non-profits worry this time could be different.
In 2011, the nation’s biggest charities swung into action to oppose President Barack Obama using limits on tax deductions to help pay for a jobs bill. Warning that such a move would hurt charitable giving, they prevailed, and Democrats looked elsewhere.
A year later, deductions are again in the cross hairs as Washington tries to avert tax increases and spending cuts. After years of successfully fending off such efforts, nonprofits worry this time could be different.
“What we’re up against now is a mega-fiscal issue,” said Chris Hansen, president of the Cancer Action Network, the advocacy arm of the American Cancer Society. “You worry that they will miss some important facts as they desperately try to come up with something that they can compromise on.”
Lobbies representing charities, home builders and oil firms are among those rushing to reverse a growing Washington consensus that tax deductions should be mined to raise fresh revenue. The result is a clash between two political priorities: cutting the deficit and preserving popular tax breaks, including deductions for charitable giving and mortgage-interest payments.
Americans will pay roughly $40 billion less in taxes in 2012 due to the charitable deduction they take, according to Congress’s Joint Committee on Taxation. That could be hard for lawmakers and the White House to ignore as they search for ways to cut future deficits.
There is no specific plan to eliminate deductions for charitable giving in current talks. Instead, proposals that have been floated focus on capping overall deductions.
The White House in the past has proposed limiting deductions to no more than 28% of income for families making $250,000 or more. Republicans including former presidential nominee Mitt Romney have suggested limiting deductions to a specific dollar amount. Others have suggesting a “haircut” option, letting taxpayers claim, for example, 80% of their current deductions.
Nonprofit leaders say that if deductions are limited, taxpayers will cut back their giving. Diana Aviv, president of Independent Sector, a coalition of nonprofits, cited studies suggesting Mr. Obama’s plan would lead to $1.7 billion to $7 billion less a year in charity giving. The impact of a dollar cap on deductions, she said, would be even greater.
That is a small part of the roughly $300 billion Americans donate yearly, but Ms. Aviv said certain charities would be hit disproportionately. “This is not a Chicken Little situation,” she said. “Something is going to happen unless we are able to persuade lawmakers that the charitable deduction is different from other deductions.”
Activists are descending on Capitol Hill next week. They have written letters to the president and congressional leaders. They are urging their supporters to contact congressional offices.
On their side is the sensitive politics of the charitable deduction, given how charities provide services in virtually every congressional district.
“I want to encourage charitable giving in this country. I think a country that doesn’t do that is a country that’s going to be in real trouble,” said Sen. Orrin Hatch (R., Utah). He said he is going to protect charities from being hurt in the deficit talks “if I can help it.”
Many lawmakers, however, say while they want to keep incentives for giving, new limits must be considered. “I don’t believe for a moment there will be an elimination of charitable deductions,” said Sen. Kent Conrad (D., N.D.), chairman of the Senate Budget Committee. “But some reforms that affect charitable deductions—I think that’s got to be on the table.”
Both sides are focusing on deductions because Democrats insist tax revenues must rise while Republican oppose tax-rate increases. That leaves few options.
Under the tax code, a person can claim a charitable deduction that matches his tax rate. A taxpayer in the 18% bracket who donates $1,000, for example, would have tax savings of $180.
Among the challenge facing charities is the large number of other groups making similar pleas to be exempted. The oil industry says any increase in its taxes would kill jobs. Home builders decry potential cuts in the mortgage-interest deduction
“This is absolutely the wrong time for them to start monkeying with housing incentives,” said Jim Tobin, a senior vice president at the National Association of Home Builders. “The mortgage-interest deduction is an integral part of the American dream.”
Nonprofit leaders and their supporters are trying to make the case that the charitable deduction is different. “Congress is a little bit focused on where they’re going to get revenue right now, and they haven’t really thought through the impact of this particular approach in their communities,” said Steve Taylor, senior vice president of United Way Worldwide.
—Damian Paletta contributed to this article.
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