The President’s Budget and Charitable Contributions: Driving Revenue and Demonstrating Fairness to Benefit America

Earlier this week, President Obama sent to Congress his budget proposal for the 2013 fiscal year. It is a bold proposal that demonstrates the President’s commitment to create an American economy that is built to last, one where job creation flourishes as a result of strategic investments to support entrepreneurship, infrastructure, and innovation–and one in which we restore fiscal responsibility and put the Budget on a sustainable path.  As we move forward to boost the economy and to strengthen our communities, nonprofit organizations have a vital role to play. 

Reflecting the Importance of Charitable Giving Through Fundamental Tax Reform

The President has called for fundamental reforms that would cut rates and tax complexity, cut unnecessary tax expenditures, cut the deficit, and observe the Buffett rule—that no one making more than $1 million should pay less as a share of their income in taxes than middle class families.

This will require tough choices.  But as we make those tough choices, the Administration recognizes the importance of tax incentives for charity.

That’s why we chose to make clear that the Buffett Rule should not disadvantage individuals who make large contributions to charity, while exempting charitable deductions from the list of tax breaks that should be eliminated for millionaires. In doing so, the charitable deduction is the only major tax benefit exempted from both of these two proposals we put forward as part of tax reform.

Targeted Reduction in the Value of Deductions and Exclusions as Part of a Balanced Framework of Deficit Reduction

Even as the President has put forward principles for comprehensive tax reform, his Budget also includes a set of specific proposals as part of a down payment towards a balanced deficit reduction plan. One of the ideas we’ve put forward as part of that down payment is limiting itemized deductions for the highest-income earners. 

For the top 2 percent of income earners, this would cap the value of itemized deductions and certain exclusions at 28 percent. 

Here’s the logic behind that proposal: Right now, if a middle-class family donates a dollar to their favorite charity, they get a 15-cent tax deduction, but the wealthiest individuals make the same donation and they get a deduction that is more than twice that.

This proposal walks that back some of the way – to the same rates as we had at the end of the Reagan Administration. So the middle-class family would still get the entire 15-cent tax deduction; it is only the very wealthiest who would find their reduction reduced, and even then, they would still get a 28 percent tax break for every dollar they donate.

However, most Americans don't get any subsidy at all for their donations because they don't itemize. As a result, taxpayers end up subsidizing multi-million dollar gifts to already well-endowed institutions such as universities while they avoid subsidizing smaller gifts to food pantries, community arts groups, homeless shelters and advocacy organizations.

Most Charitable Giving Would Not Be Impacted

These changes are unlikely to have a substantial impact on donations.  The last time the tax rate changed for high-income individuals was from 2002 to 2003, when the Bush tax cuts reduced the top income tax deduction from 38.6 percent to 35 percent.  At that time, the level of individual charitable giving rose, suggesting that other factors are much more important to the process. 

Moreover, 80 percent of overall contributions wouldn’t be affected at all, either because they come from individuals who are not found in the top two brackets, or because they come from corporations or foundations not subject to the individual income tax. 

The proposal to cap itemized deductions will affect only a tiny fraction of taxpayers - those with household incomes above $250,000.

Finally, we believe the best way to boost charitable giving is to jumpstart the economy – which is why the 2013 Budget reflects a commitment to creating an America that is Built to Last based on creating jobs, supporting critical sectors such as energy and manufacturing, and ensuring all Americans have the skills to compete in a 21^st century. 

Jonathan Greenblatt is the Director of the White House Office of Social Innovation