Proposed Limits on Charitable Tax Deductions

I see that the following press release was being prepared, and by now has been sent out by my fundraising colleagues. Here's an excerpt that explains what they're up to.

"The Association of Fundraising Professionals (AFP) and the Association for Healthcare Philanthropy (AHP) oppose the proposal in the President's budget that would impose new limits on charitable tax deductions. Both AFP and AHP applaud the President’s overall efforts in the budget to revive the economy, reform health care, revise energy policy and tackle other important issues affecting the country. However, the budget also contains a proposal that sends the wrong message at the wrong time to those who support charitable causes. It puts forward a scheme that would effectively devalue charitable gifts made by the very people who are in a position to make substantial donations at a time when they are sorely needed...the proposal would limit the federal tax deduction they may take for their generosity to 28 percent. Currently, they may claim up to a 35 percent deduction....The federal government, therefore, should seek ways to bolster charitable giving—as opposed to requiring charities to do more with less."

Frankly, in my view,while the sentiment is noble, and while this effort is historically consistent with the approach of nonprofits any time the President or Congress threatens to tinker with the tax deduction, it's not helpful now, and is in the wrong direction.

In this time, and in this economy, fighting on multiple fronts, the President needs us to to support his efforts, not detract from them for the sake of satisfying our own preferences. Sure, we'd all like the tax on capital gains and the tax on regular income to be even higher, so that the wealthy could escape even more taxation by giving to charity. That would be nice!

In reality, however, budgets need to be balanced, outputs need to equal inputs and if we're going to reduce the whopping federal deficit caused by the greed and failure of practically the entire financial system, then we need to find the money sin a host of places. If it means a few points less in charitable tax deduction, let's just thank our lucky stars we have some deduction left.

But even more to the point, as representatives of the nonprofit sector we've screamed "bloody murder" any time the tax deduction comes under fire. It's a knee-jerk reaction bourne from many years of having to defend the voluntary sector from business and political vultures who don't understand the human impulse to give and help a neighbot. Like all entities in the political process we can tend to become defensive about our turf, especially when there are those out there who don't understand the voluntary sector and its value to society and would easily vote to just wipe it out. We don't like Congress to mess with the tax deduction because we never know how that will turn out. But, while quite understandable, from the the position of having to defend our turf, and quite appropriate,from the viewpoint of being within a nonprofit organization and stretching every hard-earned donation dollar to touch as many lives as possible, nevertheless, right, now I believe this kind of defensiveness is unnecessary and unhelpful. Why?

Two reasons: First, if we're going to create a better, more just, more equitable society, then we must do more dialoguing and less debating. And dialogue involves being more open and honest, more transparent about what we're trying to accomplish, what we need to do that, and what the results will be for the measure we're advocating. Now if we can ever get the conservative Republicans to take on those characteristics that could produce some very interesting concepts, and in the process they would have to see that, basically, they are wrong about what they want to do, because it would not lead to a more just, more equitable society.

Second, when the capital gains tax was lowered a few years ago, we charities screamed, as we always do when Congress tinkers with the tax code, that donations would plummet and charities would be left high and dry. But, in the event, nothing happened. Donations didn't decrease, they kept on increasing, as they have done for the past 40 years or so. And now that the charitable deduction is proposed to be lowered to 28% from 35%, I doubt if this will make a difference in peoples' giving. Donors work around these things; they keep on giving, and they don't let a few points in the tax code prevent them from accomplishing their charitable objectives. Why?

First, because giving is from the heart. Those who want to give to charity, and are able, tend to go ahead and do that on a regular basis. The tax deduction is something of an incentive, but when donors are polled, it's way down the list. Only about 30% of donors acknowledge that the tax deduction is a motive for giving.

Second, because giving is from the head -- when the oxytocin runs, the checks get written. When people identify with those in need, they respond positively. So if we, as charities, are out there with strong, visual media promoting our case for support in compelling and motivating ways, we'll get those donations that are there to get. And as long as our boards and executives aren't afraid to invest in fundraising capacity -- and as long as fundraisers are out there forming and nurturing relationships with donors and prospects, then we're going to get the contributions we need to do our charitable mission.

The real tragedy of the situation is NOT that the President wants to lower the charitable deduction on those with incomes of more than $250,000. It's that the charities themselves are in panic mode, pulling back so hard and fast that they're destroying the ability of the professional fundraisers they employ to keep up those donor relationships that are so vital and that keep the donations coming. Boards and executives of charities in this area at least are running scared and cutting back on fundraising capabilty and infrastructure at just the time when it is most needed.

And there's good reason for many of them to be scared, too, because most of our more than 5000 charitable 501-c-3s in southeastern Michigan have not been doing their donor homework through recent years. They have not been out there forming relationships with donors, cultivating them, asking them repeatedly for their gifts and contributions to our various missions. The boards and executives, particularly in the thousands of small and mid-sized charities, have been stingy with their resources, failing to build good fundraising techniques and enlarge their pools of donors and prospects. We've been leaving a ton of money on the table by not getting out and asking anyone and everyone we see for assistance in charitable mission. It's not the President's fault; we've cut our own throats on this.

Consequently, as charities, we have no one else to blame but ourselves. I say leave the President to make the tax deduction decisions, and let the charities do a better job of applying the basics of fundraising on a day-to-day basis, so they can get the money they need to accomplish their charitable missions.

But there's another value at stake here, and along with it a better solution to the problem of taxing the wealthy. It is that we have, in essence, TWO tax codes. One for the wealthy and one for the rest of us. It's brought about by the disparity in the capital gains tax and the income tax. The wealthy may not have that much regular income. So if you drop the amount of the charitable deduction, you're not goin to net out that much income for the government to use. But the wealthy do have TONS of capital gains, and this can make up the lion's share of their income. And they are only being taxed 15% on those gains. Thus Warren Buffett was reported in the press recently as having said that his secretary is taxed more than he is!

So what to do? Mr. President, please just go ahead and forget about the charitable deduction, and please raise that capital gains tax to about 45%, OK? Now you're going to get some real money into the treasury, AND you're going to provide really wonderful incentives for charitable donations. Now the wealthy really have something to avoid. Charitable organization fundraisers could have a field day here and boost their nonprofit organization income significantly enough to take care of the great needs out there. At the same time, the U.S. Treasury will get a much bigger boost than it ever could with a paltry reduction in the charitable gift deduction.

Make sense? Sure. Unless you're wealthy. But then you have to figure that they elected to pursue money and try to get ahead of the pack in the first place so they could live better than the rest of us, so why shouldn't we, the pack, go after them in a big way!?