Obama's budget proposal threatens charitable giving

The timing of President Obama's budget proposal couldn't be worse.

obama 63 (photo credit: )
obama 63
(photo credit: )
The great Jewish philosopher Maimonides often extolled the value of giving tzedaka, charity, "solely for the sake of heaven," but here in the United States, people contribute philanthropically for other, more prosaic reasons: love of the arts, passion for science, loyalty to an alma mater - and the good old-fashioned tax deduction.
Yet that final category has lately become the subject of controversy, as President Barack Obama's recently announced $3.6 trillion budget aims to curb the deduction available to many Americans for making charitable contributions.
The move will have an especially sharp impact on a Jewish philanthropic world reeling from the economic downturn and recovering from the Bernard Madoff affair. Not surprisingly, Jewish groups have weighed in, strongly urging the president to change his mind.
So what would Obama's plan do, and why is it so problematic?
CURRENTLY, A TAXPAYER is entitled to "deduct" from his or her taxable income donations made to government-approved charitable organizations. This deduction is applied at the highest marginal rate that she pays. So if she's in the highest tax bracket and pays the Internal Revenue Service 35 percent of the highest portion of her income, she can effectively write off - and not pay - 35% of her contributions.
For example, if she makes a $5,000 donation to her local museum, she will pay $1,750 (35% of $5,000) less in taxes. (The so-called Alternative Minimum Tax complicates the analysis a bit.)
President Obama's proposed budget, however, aims to do two things. First, it will increase the highest marginal rate from 35% to nearly 40% for couples earning more than $250,000 yearly. Second, it will cap the charitable deduction at a 28% rate. So, essentially, the same woman paying taxes at a marginal 35% rate will only be able to deduct 28% of her contribution; the same $5,000 gift would yield a tax savings of only $1,400.
Thus, families in higher tax brackets will not only see their marginal rates increase but will also see a reduction in the deductibility of their donations.
This whipsaw effect has sparked an outcry from national charities, in particular from Jewish organizations. Even groups ordinarily sympathetic to the Obama administration's policies have voiced serious reservations about the budget proposal.
WILLIAM DAROFF, vice president of public policy for United Jewish Communities, said the UJC was "troubled" by the budget, explaining that "numerous studies confirm that any reduction in the tax benefits available for charitable giving will have a significant negative impact on giving."
Expressing its "grave concern" over the plan, the Orthodox Union stated that "the tax deductibility of charitable contributions is, apart from a person's generosity of spirit, the most powerful tool America's charities possess to raise funds that enable them to serve their brothers and sisters."
Even the Jewish Council for Public Affairs, which praised other aspects of Obama's budget, fretted that the deduction reduction "would provide a disincentive for charitable giving at a time when our nation's charities and nonprofit organizations most need donations in order to continue and strengthen the critical services they provide."
The plan's timing couldn't be worse. Jewish charitable groups are suffering from endowments depleted by the stock market collapse and Bernard Madoff's depredations, and thus require increased annual contributions, especially as the economy's deterioration intensifies the need for the services they provide.
As the UJC's Daroff argued, "At a time when charities are literally going bankrupt, are seeing a huge increase in the demand for social services and a simultaneous decrease in resources to fund programs, governmental policy should be to incentivize charitable donations - not creating more reasons for donors to forgo making contributions."
Some in the nonprofit world have argued that these incentives are grossly overrated, and that wealthy donors will continue giving no matter what the tax implications are.
WE DISAGREE. While most nonprofits rely on a few major donors for large contributions, they simply cannot survive without the legions of middle- and upper-middle-class donors who form the core of any philanthropic pyramid. And while major gifts may not be affected by the president's plan, the middling contributions - four- and even five-figure gifts - surely will be.
In addition, the mid-range donors of today become the major givers of tomorrow. If the tax scheme fosters stingier giving habits in them now, those tendencies will become even more pronounced in the future.
We asked Daroff what he thought about the argument that any disincentives will be slight. He pointed out that the UJC receives a whopping 40% of its contributions in December, which coincides with the end of the tax year. He also noted that even under the optimistic estimates of budget groups close to the Obama administration, the new plan would mean a $5 billion reduction in annual donations across the board - and $50 million for the UJC alone. "This may be de minimis to an economist with a slide rule," Daroff told us, "but it's actually quite a large loss."
Moreover, studies consistently show that Americans contribute to charities far more than their European counterparts. (Israel, interestingly, is close behind the United States, and within the US, members of religious communities, including Jews, are more likely to contribute than their secular counterparts to both religious and secular organizations.)
The economic equality differences between the US and Europe alone cannot explain this discrepancy; after all, many Europeans - think immigrant communities - also languish in chronic poverty. More likely, Europe's crushing tax and regulatory regimes provide strong disincentives to donate; Europeans effectively subcontract their giving to the state.
So could it be that the Obama administration desires this kind of relationship between the government, individual contributors, and charities? Such a transformation of the philanthropic sector would be contrary to the American spirit of generosity and the Jewish ethic of tzedaka and tikkun olam.
So as Purim approaches, and we are reminded of our obligation to give to the needy, we add our voices to the rising chorus of American Jews hoping, and praying, that President Obama will reverse course.
Debra Rappaport Rosen is a professional nonprofit fund-raiser, and Michael M. Rosen, her husband, is an attorney. They live in San Diego, California.