from: http://philanthropy.com/news/updates/index.php?id=7244

Obama's Plan to Reduce Charitable Deductions for the Wealthy Draws Criticism
By Suzanne Perry
Washington
New updates:
Several billion dollars could be lost in charitable gifts because of the tax proposal, say philanthropy scholars.
The White House says that the plan won’t hurt charities, in part because it doesn’t take effect until 2011, when Obama officials expect the economic recovery to have begun.
Original article:
Some charities and nonprofit experts are worried that President Obama’s proposal to impose new limits on charitable tax deductions for wealthy people would dampen giving at a time when charities are under severe strain because of the recession.
“During the current economic downturn, which has forced nonprofits to do more with less, any proposal which would result in a decrease in private giving will be a disaster for America’s charities, and for those who depend upon them,” said United Jewish Communities, an umbrella group for Jewish social-service charities.
Mr. Obama proposed the new caps on Thursday as a way to finance changes in the country’s health-care system.
In a document outlining his 2010 budget plans, President Obama proposed limiting the value of the tax break for itemized deductions, including donations to charity, to 28 percent for families making more than $250,000. In other words, taxpayers would save 28 cents on their federal income taxes for each dollar donated.
That would reduce by as much as 20 percent the amount wealthy taxpayers could get in tax breaks. Under the current system, taxpayers who are in the 33 percent or 35 percent tax brackets use that rate to claim deductions.
The president says the proposal on itemized deductions — which would also apply to claims such as mortgage interest — would raise $318-billion over 10 years. That money would help pay for a 10-year $630-billion reserve fund designed to help make health care more affordable and available.
Independent Sector, a coalition of charities and foundations, and the Council on Foundations were among the nonprofit groups that lined up to express concern that the proposal would prompt donors to pull back.
But others say the effect could be limited or should be viewed in the context of the broader goals the president is trying to achieve with his budget proposals. (Update: Indiana University scholars estimated on Friday afternoon that several billion dollars in giving by the affluent were probably at stake.)
‘Rebalance the Tax Code’
The proposal to limit the itemized-deduction rate is included in a package of measures designed to free up money for the reserve fund, including reducing Medicare overpayments, cutting drug prices, and improving post-hospitalization care as a way to reduce readmissions.
The plan is an effort to “rebalance the tax code so that the wealthiest pay more,” the document says.
“With this budget, we are making a historic commitment to comprehensive health-care reform,” President Obama told a news conference. “It’s a step that will not only make families healthier and companies more competitive, but over the long term it will also help us bring down our deficit.”
But the idea has drawn mixed reactions in the nonprofit world.
Rob Reich, an associate professor at Stanford University, urges critics to look at the big picture. “Is the good that will be done through health-care reform greater than the good that would have been done with the charitable projects of the wealthy people [who might decrease their gifts]?” he says.
He argues that the charitable deduction increases the inequalities between rich and poor because people with smaller incomes often don’t earn enough to itemize, and if they do they get less of a break because they are in a lower tax bracket.
But Sheldon Steinbach, a lawyer in Washington who represents colleges and universities, says the proposal could have drastic consequences for many groups.
“Any disincentive to charitable giving, especially in the current economic climate, will have an impact far beyond the black letter law,” Mr. Steinbach says. “It will have an exponentially negative impact.”
But while many charitable-giving experts expressed alarm about how reduced rate for charitable deductions would affect giving by wealthy Americans, others say that Mr. Obama’s proposal may be less cause for concern than it initially appeared.
The reason: Many wealthy Americans who would otherwise be in the 33- or 35-percent tax bracket — and thus able to take that same percentage deduction for their charitable gifts — have used mortgage payments and other deductions to qualify for the alternative minimum tax rate of 28 percent, says Robert F. Sharpe, a Memphis planned-giving consultant.
By paying the alternative minimum tax rate of 28 percent, those wealthy taxpayers are already restricted to the same percentage on their charitable deductions, Mr. Sharpe says. “A lot of the rich are already used to the 28-percent deduction,” which means the Obama proposal would not result in any change for them.
For those wealthy individuals who currently qualify for the 33- or 35-percent rate, however, President Obama’s proposal would have some financial impact.
To illustrate, Mr. Sharpe offers the example of a wealthy donor in the top tax bracket who makes a $100,000 gift. The donor currently would save $35,000 in taxes, or 35 percent of the gift. Under President Obama’s proposal, that same donor would save only $28,000, or 28 percent — a difference of $7,000. (Editor’s note: this sentence originally referred incorrectly to the $35,000 and $28,000 as the amount that could be deducted, instead of the amount saved in taxes.)
Mr. Sharpe says the proposal would unfairly penalize the most generous taxpayers since wealthy people who give nothing to charity would not face such a tax increase.
Impact on Large Institutions
Bruce Flessner, a fund-raising consultant at Bentz Whaley Flessner, in Minneapolis, says the plan would probably have little impact on organizations that have a broad pool of donors. But large institutions — particularly colleges and universities and academic medical centers — could be particularly hard hit if the plan moves forward.
“It seems like unusual public policy to try, as the president announced to the Congress this week, to return the United States to world leadership in access to higher education and then make it more difficult for extraordinary donors to contribute great gifts to colleges and universities,” Mr. Flessner says.
“Likewise, it seems like unusual public policy to penalize the great medical centers that contribute so much to scientific breakthroughs by making it more difficult for donors to make the six-, seven-, eight-, and nine-figure gifts,” he adds.
Eric Kessler, who advises major donors and foundations for Arabella Philanthropic Investment Advisors, says the proposed limits would not likely immediately affect the behavior of the biggest donors, who tend to plot their giving strategically. “I think it has an effect over time, but I don’t think anybody’s going to pick up the paper tomorrow and say, let’s forgo our commitment to the local theater group.”
But he says its could affect mid-range donors — say those who give in the $1,000 range — “who are less driven by strategy and for whom the deduction plays a significant role in their giving.”
Michael W. Peregrine, a lawyer in Chicago who advises nonprofit groups, says charities are now facing a “triple play” that could cut into their donations — the bad economy, the proposed charitable-deduction limits, and proposals by President Obama to end tax cuts for wealthy people that were introduced by President Bush.
He says he worries that charities that are hurting for donations will become more vulnerable to fund-raising scams. “What is certain is that the perception that this will reduce charitable donations in the short term is going to draw out the fraudsters,” he says.
Republicans who oppose President Obama’s budget proposal have also taken aim at the charitable-deduction measure. “During this difficult time, charities provide vital support mechanisms for families in need of help, and this budget is a direct assault on the financial resources they require,” Eric Cantor of Virginia, the House Republican whip, said in a statement.
But the proposals will not necessarily change giving patterns, says Giving Institute, an association of consultants in Glenview, Ill., and its research arm, Giving USA Foundation.
They noted in a statement that 53 percent of high-net-worth donors surveyed in a 2006 study for Bank of America said their giving would stay the same, or even increase, if the tax deduction for charitable gifts fell to zero.
Giving Institute members have found that “the most important factor in how much people give is how committed they are to the purpose of the request,” the statement said. Furthermore, giving will increase when wealth is created and “if the president’s plan generates more wealth for Americans then giving will go up.”
Holly Hall contributed to this article.
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Thursday February 26, 2009 Permalink