Congress Slated to Discuss Charitable Contributions
February 12, 2013
As Congress begins to address and discuss comprehensive tax reform, the Committee on Ways and Means will hold a hearing to examine charitable contributions this week on Valentine’s Day. As the Committee assesses the benefits of the itemized tax deduction for charitable contributions, they also must closely evaluate the cost of allowing charities to enjoy preferential treatment by the tax code. Because of the itemized deductions, the cost of donating to charity is effectively lowered by an individual’s highest marginal tax rate. For example, if I face a marginal tax rate of 39.6%, my one dollar donation that is deducted from my taxable income only costs me 60.4 cents because I avoid paying 39.6 cents in federal income taxes. Thus, the deduction actually costs the government 39.6 cents in lost revenue, but the charity receiving the donation gains one dollar in revenue. In essence, the tax code subsidizes charitable giving and creates an incentive for individuals to donate, but it is at the expense of reducing the tax base.
The individual income tax deduction for charitable donations has been part of the federal tax code for almost as long as the federal income tax. It was implemented as part of the Revenue Act of 1917. Deductions for charitable donations were expanded to estate tax returns as part of the Revenue Act of 1918 and eventually extend to corporations in 1936. Under the Tax Revenue Act of 1969, the maximum deduction limitation was increased from 30% to 50% of adjusted gross income. In recent years, few changes have been made. However, as of 2006, all 501(c) (3) organizations must make their T-990 forms publically available, and as part of the fiscal-cliff bill, limits on deductions and exemptions were reinstated under Pease and the Personal Exemption Phaseout.
These limitations on deductions already have many non-profit groups, like the Alliance for Charitable Reform, concerned that they may adversely affect donations from taxpayers, especially among taxpayers in the highest marginal tax bracket. Meanwhile, lawmakers are beginning to consider ways to address the federal deficit through tax reform. Hence, lawmakers must determine whether the marginal impact of the income tax deduction for charitable donations is greater than the infra-marginal impact. In other words, does the charitable contribution deduction incentivize taxpayers to increase their donations enough to outweigh the cost of lost government revenue, and does the increase in charitable contributions contribute to society by providing a “public good”?
This hearing will hopefully contribute to the dialogue surrounding the fate of the charitable contribution deduction as lawmakers listen to the testimonies from non-profit groups and from experts on previous proposals for modifying the deduction.