Fiscal Cliff Leaves Non-Profits on Edge

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Charities are worried this may be the last season of giving.

As Congress grapples with tax reform and deficit reduction, lawmakers are looking at limiting some long-standing tax deductions, including the one for charitable giving, as a way to raise revenue.

President Obama already supports limiting the amount of tax-free giving Americans can do; his proposed 2013 budget would limit the value of all itemized deductions to 28% for families making $250,000 or more a year, or for individuals making $200,000 and up.

And with the so-called “fiscal cliff” looming and Republicans warming to the idea of raising more revenue withoutincreasing tax rates, limiting deductions for the wealthy appears likelier than ever.

Steve Taylor, Vice President for Public Policy at United Way, worries that new limitations would hobble his organization, the largest charity in the country. According to Taylor, 15% of United Way’s $4 billion annual revenue comes from the top 1/3 of 1% of donors.

William Daroff, VP for Public Policy at the Jewish Federation of North America, says his group follows the 90/10 rule. “90% of our donations come from our top 10% of donors,” he says.

Because wealthy Americans would likely deduct their mortgage interest, state and local taxes, property taxes and health insurance premiums before making charitable gifts, organizations like United Way and JFNA could take a big hit. Some proposals would “virtually eliminate[e] the charitable deduction for a certain class of people,” Taylor says.

According to the Tax Policy Center, Obama’s plan would raise revenue by $164.2 billion over 10 years. Although it’s incredibly unlikely to happen, ending all itemized deductions would raise around $2.2 trillion over 10 years.

Despite those figures, Rev. Larry Snyder, President of Catholic Charities, says that there may be some hidden costs in taking away incentives to give. “If we have to cut back our services, then the government is just going to have more people at their door,” says Snyder. “It really is one of those things where you cut off your nose to spite your face.” Catholic Charities provides aid to more than 10 million Americans in poverty.

The debate over itemized deductions is coming at a difficult time for charities. According to the Nonprofit Finance Fund, 85% of nonprofits experienced higher demand for services in 2011, and at least 70% have seen increased demand since 2008. The Charitable Giving Coalition estimates that Obama’s plan could reduce charitable giving by up to $5.6 billion a year.

On December 4 and 5, Charitable Giving Coalition, a group of hundreds of nonprofit leaders including United Way, JFNA and Catholic Charities will gather on Capitol Hill for “Protect Giving- D.C. Days” to try to persuade Congress to leave the charitable deduction untouched. And there are signs such a deal is possible.

Third Way, a centrist Democratic advocacy group, has proposed capping itemized deductions at $35,000 while excluding the charitable deduction. Jim Kessler, VP for Policy at Third Way, says the proposal was well received on Capitol Hill. “There is a wellspring of good feeling toward charities and charitable donations,” he says.

Kessler believes there are two reasons the charitable deduction will survive. “One is political, which is, you don’t want everyone from the Catholic church to the New York City ballet to the local soup kitchen opposing you. And number two is that charitable work is extremely valuable and it should have a preference in the code.”