I spent the first day of spring 2013 fast-walking Capitol Hill with foundation colleagues from all across the country. Hundreds of us were there for Foundations on the Hill, philanthropy’s annual push to remind lawmakers why giving matters.
In brief encounters with our elected officials and their staffs, we tried to connect the dots between their priorities and ours. We reminded them of the essential work our grantees are doing every day to make communities better, to make our nation stronger and more just.
The best Foundations on the Hill moments come when you find yourself sitting across a small table from a U.S. senator as she nods and says, “Exactly. I know. I’m with you. Tell me what I can do to help.”
The funniest moments come when you realize the junior staffer who’s been tapped to meet with you doesn’t actually know what a foundation is. He blinks and asks, “So, foundations—is that the construction industry then?” I am a great believer in the value of humbling experiences. Foundations on the Hill is good that way.
Most years we’ve put forward a number of talking points on policies to protect and enhance philanthropy. This year, though, as deficit reduction and tax reform dominate the national discourse, the Council on Foundations and its Foundations on the Hill co-sponsors urged us to focus on one single point: preservation of the charitable deduction in the tax code.
The charitable deduction works roughly like this. If you give $100 to a charitable organization and itemize that gift on your tax return, your taxable income is reduced by that $100. If you pay federal income tax at the 25 percent rate, you pay $25 less in tax that year. If you pay at the highest rate, which is now 39.6 percent, you pay $39.60 less. So the deduction provides a larger savings to wealthier taxpayers.
That fact has led to repeated proposals by the current administration to cap the deduction at 28 percent as a way to make sure more revenue remains subject to taxation at the highest level. In other words, a $100 gift from a taxpayer in the 39.6 percent tax bracket would reduce the giver’s taxable income not by $39.60, but by $28. The notion is that such a cap will bring desperately needed funds into the treasury in a way that wealthier donors can easily afford.
This sounds good, but credible research suggests the change would drive down charitable giving. The negative impact on the nonprofit sector could be massive—on the order of $5.6 billion in yearly donations that would dry up. The Charitable Giving Coalition points out that this is more than the annual budgets of the American Red Cross, Goodwill Industries International, YMCA of the USA, Habitat for Humanity, Boys & Girls Clubs of America, Catholic Charities USA, and the American Cancer Society combined.
This loss of resources, which would be felt by nonprofits already hit hard by the Great Recession, is unacceptable. Our charitable institutions and the communities they serve simply cannot afford a deficit solution that drives down charitable giving.
I also came away from Foundations on the Hill with a sharpened sense of why this idea is not just alarming in practice, but flawed in theory, too. Ever since its creation a century ago, the charitable deduction has enshrined in the tax code a quintessentially American idea: Charitable giving comes before our obligation to fund Uncle Sam. That’s why the deduction operates by reducing taxable income. The money my family chooses to give to the local food shelf, or our public radio station, or the Red Cross, is money invested in the common good rather than saving or spending it ourselves. It should not be subject to government intervention, including the government’s taxing authority.
We in the social sector should embrace the challenge of meeting our nation’s fiscal challenges. We should offer our help and our best thinking. But if we accept the idea that a charitable deduction capped at 28 percent is good enough, then we accept that the government comes first. In this country, the people come first, not our government. We, the people, give generously to the community organizations we care about. The tax deduction for those gifts has endured through many crises, including two world wars and the Great Depression. Lawmakers who assert that today’s challenges are graver than those, and that therefore we must weaken this provision, should look elsewhere for the revenue we need.
Kevin Walker is president and CEO of the Northwest Area Foundation.
Source: Charitable Giving in America: An Infographic, Charitable Giving Coalition, 2012. www.protectgiving.org
This perspective on the charitable deduction was informed by a presentation by attorney Alexander Reid, former staff member for the Joint Committee on Taxation, on March 19, 2013, during Foundations on the Hill.