The nonprofit sector is pressuring lawmakers and the White House to protect the charitable tax deduction.
The tax-reform plans released by the Trump administration and House Republicans would keep the deduction for charitable donations, but also increase the size of the standard deduction, likely reducing the number of people who would use the tax preference.
Groups in the nonprofit community say that policy change would have disastrous consequences, cutting into charitable donations nationwide.
They are pushing for tax reform to allow all taxpayers to use the charitable tax deduction, even if they don’t itemize on their filing — a so-called universal charitable deduction.
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The idea was presented to a high-profile audience on Thursday, when a group of representatives from foundations met with Vice President Pence and key lawmakers. Policymakers are open to the proposal, but it’s unclear whether they will ultimately adopt the idea.
Congressional Republicans and the White House want to pass a tax-reform bill this year, and their top priorities include making the tax code simpler and cutting taxes for the middle class.
To reach that goal, Republicans intend to substantially increase the size of the standard deduction and eliminate all itemized deductions besides those for charitable donations and mortgage interest. They also plan to lower tax rates and repeal the estate tax.
Nonprofits and foundations were pleased to see that the charitable deduction wasn’t eliminated in the GOP proposals, and they are supportive of tax reform.
But they are worried that plans to create a bigger standard deduction, lower tax rates and repeal the estate tax would result in a decline in giving. To remedy this, the charitable community is suggesting that non-itemizers be eligible for the charitable deduction.
“What’s important is keeping the full scope and value of the deduction,” said Hadar Susskind, senior vice president of government relations for the Council on Foundations.
Currently, about one-third of taxpayers itemize their deductions instead of taking the standard deduction, and most itemizers deduct charitable contributions. If the standard deduction becomes much bigger, as both the House blueprint and the Trump administration have proposed, the percentage of taxpayers who itemize is expected to drop significantly.
Following the release of the House GOP blueprint and conversations with lawmakers, Independent Sector — a coalition of charities, foundations and corporations — commissioned a study conducted by Indiana University about tax policy and charitable giving.
The study, released in May, found that increasing the standard deduction and lowering the top individual tax rate to 35 percent would decrease charitable giving by up to $13.1 billion per year. However, if policymakers also expanded the charitable deduction to those who don’t itemize, there could be a net gain in charitable giving of up to $4.8 billion per year.
Groups in the charitable community have floated the universal deduction in meetings with lawmakers and their staffs as well as with administration officials.
During a fly-in on Thursday organized by Philanthropy Roundtable and the Alliance for Charitable Reform, foundations and groups met with Pence, House Ways and Means Committee Chairman Kevin Brady (R-Texas), House Republican Conference Chair Cathy McMorris Rodgers (R-Wash.) and Rep. Tom Reed (R-N.Y.). They also met with Treasury Department officials and staff for Senate Majority Leader Mitch McConnell (R-Ky.).
Attendees at the meetings said that policymakers were positive about the charitable sector and willing to entertain the universal deduction idea.
“My impression was that the administration is giving serious consideration to the universal deduction,” said Brian Walsh, executive director of the Faith and Giving Coalition.
Alliance for Charitable Reform Executive Director Sandra Swirski said that, “while there were no commitments, the offices were very open to hearing about it.”
Pence said in his public remarks that the administration is interested in foundations’ thoughts about how to boost the economy.
“A more prosperous America can be a more generous America, and so I want to assure you that the president and I and our entire administration are anxious to get your counsel on how we might continue to promote economic growth,” he said.
Brady told reporters Thursday that his committee is giving the universal charitable deduction idea a “very serious look.”
“Ways and Means Republicans have been examining … how do we unlock more charitable giving and how do we encourage more of it, not just for the 5 percent of Americans or so who will itemize under the Republican blueprint, but at all income levels,” he said.
One issue that policymakers could have with the universal charitable deduction is cost, since above-the-line deductions result in more revenue losses to the federal government than itemized deductions. The Indiana University study found that implementing a universal charitable deduction on a standalone basis would cost between $11.6 billion and $13.1 billion per year.
Scott Greenberg, a senior analyst at the Tax Foundation, said that a proposal to expand the charitable deduction “merits close scrutiny from lawmakers.”
If lawmakers think that the current tax code is problematic because it’s full of subsidies for specific economic activities, they “should be wary about expanding any of the targeted provisions in the tax code for fear of making the problems in the current tax code worse,” he said.
But leaders in the charitable sector noted that the universal deduction would help low- and middle-income people who donate to charity, since taxpayers who now itemize deductions are often wealthy. They also said that the deduction for donations is different from other tax preferences because it’s for money that individuals give up.
“We feel we’re in a pretty unique space with that,” said Jamie Tucker, director of public policy strategy and operations with Independent Sector.