‘Tis the season for charitable giving, both because of the holiday spirit and the scramble for tax deductible donations before year’s end. America’s wealthiest households are responsible for a significant portion of overall charitable giving; itemizers, for instance, are responsible for 59 percent of all household giving. More specifically, wealthy donors come disproportionately from liberal “blue states,” where both income and property tax rates are higher — and thus the charitable tax deduction provides an extra incentive to give.
A White House tax proposal that would sharply limit the value of the charitable tax deduction could effectively target nonprofits in such states; it could mean that, by this time next year, charitable giving in these and other blue states may drop. As I spell out in a paper for the Manhattan Institute, this would jeopardize the income of some of the nation's leading universities, hospitals and museums, a great many of which are headquartered in New York and California.
This year, as it has every year since taking office, the Obama White House has proposed to cap the value of the charitable tax deduction at 28 percent of the contribution made — even for those whose top marginal tax rate has gone up (since this past January) to 39.6 percent. With the proposed plan, instead of reducing their tax burdens by 39.6 cents on a dollar by giving to nonprofit groups and foundations — as they can now — they’d only see a 28 cent per dollar tax break for such giving. Think of it as an increased price for charitable giving.
One would expect then, that any reduction in the incentive for the wealthy to reduce their taxes by giving to charity would have a significant impact on overall donations. In an important paper published earlier this month, Arthur Brooks, president of the American Enterprise Institute, found that the Obama's “28 percent” solution -- which, it should be noted, would apply to all tax deductions, not just charitable giving -- could reduce overall donations by as much as $9.4 billion, or 4.5 percent of the $211 billion in overall household giving.
This is no mere hypothetical. The Obama proposal could be considered in the coming months by the tax reform caucus being led by Senator Max Baucus, D-Mont., chairman of the Senate Finance Committee, and Rep. Dave Camp, R-Mich., chairman of the House Ways and Means Committee, who have said they considered everything on the table to simplify the tax code.
The core of idea of tax reform — to simplify the tax code to limit the influence of special interests and minimize economic distortions through government subsidy or tax incentives — is worthy and overdue. But it is not unreasonable to demand that any reform plan strive to maintain at least the current level of U.S. charitable giving. In contrast to, say, the mortgage interest deductions, charitable donors do not receive personal benefits from their gifts. Instead, they help others. More broadly, charitable giving can be thought of as a national nonprofit venture capital fund for innovative approaches to helping the needy, conducting medical research and bolstering laudable deeds from organized religion. Americans have never wanted to shift these efforts to government, but every dollar redirected from charity to the IRS instead flows to government.
To adopt tax policies that would curtail charitable giving, one must believe that government can spend it more wisely. It’s worth debating whether major hospitals or universities should continue to enjoy nonprofit status. It’s worth debating the appropriate role of philanthropy in America. But it’s simply not a good idea to cut charitable giving without regard for its effects and without being mindful of the particular pain that will be felt in our largest states.Howard Husock is the vice president for policy research at the Manhattan Institute and author of "Philanthropy Under Fire." A version of this piece originally appeared on the author's Forbes.com blog, Philanthropy and Society.