Federal Income Tax Reform Could Harm Charitable Contributions

By eliminating or restricting the tax deductibility of charitable contributions, proposals for a simplified tax code could dampen the cheerfulness with which Americans give away their money.

Three plans may be considered by Congress and hammered into a compromise early this year. One of them, originating in the Reagan administration, contains four points that would affect donations:

• People who do not itemize deductions on their federal income tax return would no longer be able to take a single deduction for charitable gifts. Since 1982, that has been the one exception allowed for taxpayers who do not itemize. Because of other provisions in the tax simplification plan, it is likely that many more people would not itemize deductions if the plan became law.

• No deductions would be permitted until contributions pass a threshold of 2 percent of adjusted gross income. A person earning $25,000 and making $1,200 in donations could deduct only the last $700 from his taxable income. According to Independent Sector, a coalition of voluntary organizations, the median amount donated by American taxpayers is 1.97 percent. The 2 percent threshold would prevent more than half of them from taking a deduction.

• The top tax bracket would drop from 50 percent to 35 percent. As a result, wealthy donors would receive a tax benefit from only 35 cents out of every dollar donated, compared to 50 cents under current law.

• No deductions would be allowed for capital gains on property or investments, so major gifts of land and assets could dwindle.

The administration proposal, prepared by Treasury Secretary Donald Regan, almost certainly will not pass Congress intact. Some new leaders in the Senate question whether tax simplification is necessary at all if it does not help reduce the federal budget deficit.

Shortly after Regan’s plan was released, Senate Finance Committee Chairman Robert Packwood (R-Oreg.) said he prefers the existing tax code. His committee will have the first crack at developing a compromise.

Nonetheless, some Christians in Washington are alarmed because deductions for charitable giving have never before been challenged. Art Borden, executive director of the Evangelical Council on Financial Accountability (EFCA), sees it as a foot in the door. “Like the Equal Rights Amendment, these proposals won’t die but will be renewed year after year as tax reform comes before Congress,” he said. “Frankly, we’re concerned about what this will do to our [EFCA] members and their contributors.”

Donors give money because they are motivated by a particular cause or appeal, Borden said, not because of an anticipated tax break. But the tax break helps determine the amount that is contributed.

Bob Smucker, vice-president for government relations at Independent Sector, estimated that the Treasury Department proposal, if left intact, could cost charitable organizations $13 billion, or 25 percent of their total income from donations. Some 40 percent of all charitable giving goes to churches and religious organizations.

The Treasury Department proposal takes a pragmatic stance. Because most donors are not motivated by a tax break, the Treasury Department is proposing the 2 percent threshold. A deduction on giving from the first dollar “only reduces revenues and causes all tax rates to be higher, without stimulating giving,” the report says. In addition, the plan would eliminate the tax break for those who do not itemize deductions because it “creates unnecessary complexity, while probably stimulating little additional giving and presenting the IRS [Internal Revenue Service] with a difficult enforcement problem.”

Brian Waidmann, legislative aide for tax matters to U.S. Sen. William Armstrong (R-Colo.), said the Treasury Department idea as a whole is “conceptually brilliant, but it was created in a greenhouse.” Its chances of survival in Congress depend on President Reagan’s level of enthusiasm—as yet an unknown—as well as lobbying efforts by private sector groups.

Waidmann said Independent Sector and its members constitute one of Capitol Hill’s most powerful, effective lobbies. That reputation could be tested as Congress explores all options for tax simplification and deficit reduction.

Have something to add about this? See something we missed? Share your feedback here.