Senate Finance Committee Considers Modification of Charitable Deduction

November 3, 2011

The Senate Committee on Finance held a hearing on Oct. 18, 2011, regarding the income tax charitable deduction and tax incentives for charitable giving. The Committee is examining potential modification of the deduction as part of overall tax reform. President Obama’s administration has proposed capping the value of all itemized deductions, which would affect high-income taxpayers who are in higher tax brackets for income tax purposes. Charities should continue to monitor this discussion because any change in the deduction could greatly affect their fundraising efforts.

In the hearing, Chairman Baucus (D-MT) emphasized the need to ensure that the charitable deduction is fair and effective, both for the nonprofit sector and taxpayers, while Ranking Member Orrin Hatch (R-UT) urged members of the Committee to be wary of proposals that would lessen the levels of charitable giving. Sen. Chuck Grassley (R-IA) stated his opposition to a cap on the deduction as merely discriminating against higher-income taxpayers, rather than reforming the deduction to close loopholes.

The Committee heard testimony from several witnesses, including Frank Sammartino, Assistant Director for Tax Analysis in the Congressional Budget Office (CBO). The CBO released a study earlier this year analyzing several proposed options for changing the structure of the deduction. For more information and the text of that study, see CBO Study Examines Options for Charitable Giving and Tax Consequences. Mr. Sammartino summarized the results of the study and the cost to the government of subsidizing charitable contributions. The CBO does not currently have estimates on the effects of the proposal to cap the value of the charitable deduction.

The Joint Committee on Taxation (JCT) also prepared a report in advance of the hearing that reviewed the history of the charitable deduction, the economic rationales for the charitable deduction, and the economic effects of the charitable deduction, including the cost to the government in lost revenue. The JCT report noted that, because higher-income taxpayers tend to give to education, healthcare, and arts organizations, a policy change that affects the incentive of higher-income taxpayers to give would likely affect those organizations to a greater degree than other charities. The full text of the JCT report can be found on the Committee’s website.

The Senate Finance Committee also heard from C. Eugene Steuerle, a fellow with the Urban Institute, who suggested a number of ways to reform charitable giving, and Brian Gallagher, President and CEO of United Way Worldwide, who urged the Committee to preserve the charitable deduction for all donors citing the negative effect of a floor on the average donor’s incentive to give. Dallin Oaks, former president of Brigham Young University and an Elder in the Church of Jesus Christ of Latter-day Saints, reminded the Committee that the charitable deduction enables taxpayers to have the freedom to choose which charities they wish to support, rather than having the government choose for them.

The Senate Finance Committee has indicated that it will continue to examine the charitable deduction in the future, possibly as part of overall tax reform. The Senate Finance Committee hearing may lead to legislation that would change the charitable deduction and thereby affect the charitable giving behavior of taxpayers. Charities should pay close attention to this issue as the Senate Finance Committee moves forward.

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