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President Obama's recently released budget includes a proposal for a cap on charitable contribution deductions for higher-income Americans. This cap is being proposed to equalize the value of a contribution deduction among taxpayers in different tax brackets. Without such a cap, the value of a charitable contribution deduction would be greater for higher-income taxpayers in higher marginal tax brackets.

If passed, the 33 percent and 35 percent "EGTRRA" (Economic Growth and Tax Relief Reconciliation Act of 2001) tax rates would "sunset" beginning in 2011, meaning that the pre-EGTRRA rates of 36 percent and 39.6 percent would be reinstated. The President's budget also would let EGTRRA's phase-out of the so-called "Pease" limit (named after the congressman who proposed it) sunset beginning in 2011, and would limit a charitable contribution deduction to not more than 28 percent of the amount of the contribution for taxpayers with annual income in excess of $250,000.

Will charitable giving dry up if this proposal is implemented? Several studies on the impact of charitable contribution limits on charitable giving have produced conflicting results. Some studies suggest that charitable giving is adversely affected by less favorable deduction rules, while other studies indicate that the effect is minimal. Also, the President's proposed limit on itemized deductions would not take effect until 2011. Some tax professionals have suggested that this might actually encourage donors to make larger contributions in 2009 and 2010, before the President's proposed limits would take effect. By 2011, when the new, more restrictive limit takes effect, the recession will likely be over and donors will be in the mood to make donations in spite of the new limit. Other tax professionals point out that any incentive to contribute larger amounts now to avoid the lower deduction limits in 2011 will be offset by the current recession.

In his acceptance speech during the 1988 Republican National Convention, presidential candidate George H.W. Bush famously pledged, "Read my lips: no new taxes." Two years later, as president, he reluctantly broke his promise and signed the Omnibus Budget Reconciliation Act of 1990. This Act raised taxes in a number of ways, including the Pease limit on itemized deductions. This limit required certain itemized deductions, including charitable contributions, to be reduced by 3 percent of a taxpayer's adjusted gross income over $100,000 (adjusted annually for inflation), but not by more than 80 percent.

In 2001, Congress enacted a law—the Economic Growth and Tax Relief Reconciliation Act of 2001, or "EGTRRA"—that phased out the Pease limit by one-third in 2006 and 2007, by two-thirds in 2008 and 2009, and by 100 percent in 2010. To illustrate, for 2009, a deduction for most itemized deductions (including charitable contributions) is reduced by the smaller of the following, reduced by one-third: (1) 3 percent of the amount by which adjusted gross income exceeds $159,950 ($79,975 if married filing separately), or (2) 80 percent of itemized deductions that are affected by the limit.

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