WASHINGTON — The Obama administration and the nation’s most prominent charities are embroiled in a tense, behind-the-scenes debate over President Obama’s push to scale back the nearly century-old tax deduction on donations that the charities say is crucial for their financial health.
In a series of recent meetings and calls, top administration aides have pressed nonprofit groups to line up behind the president’s plan for reducing the federal deficit and averting the year-end “fiscal cliff,” according to people familiar with the talks.
In part, the administration is seeking to win the support of nonprofit groups for Obama’s central demand that income-tax rates rise for upper-end taxpayers. There are early signs that several charities, whose boards often include the wealthy, are willing to endorse this change.
But the administration is also looking to limit the charitable deduction for high-income earners, and that has prompted resistance, with leaders of major nonprofit organizations, such as United Way, the American Red Cross and Lutheran Services of America, opposing any change.
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“It’s all castor oil,” said Diana Aviv, president of Independent Sector, an umbrella group representing many nonprofits. “And the members of the nonprofit sector I represent don’t want any part of it. It’s a medicine we’re not willing to drink.”
The dispute is the latest in a long-standing struggle over the popular tax provision, which allows people to deduct charitable donations from taxable income.
Since Obama first proposed lowering the deduction in 2009, more than 60 nonprofit groups have spent at least $21 million lobbying to preserve it, records show. Although nonprofit officials characterize the effort as grassroots, at least 25 organizations have also hired Washington-area lobbying firms.
The lobbying by some of the biggest players in the philanthropy world has intensified in recent weeks amid spreading concern over whether the charitable deduction could be affected by a deal to avoid the automatic spending cuts and tax increases set to kick in Jan. 1. Nonprofit-group leaders say lowering or eliminating the deduction would reduce giving by wealthy donors. Studies have shown that people would donate less if the deduction were reduced but estimates of the effect vary widely
“It would be devastating,” said Jatrice Martel Gaiter, executive vice president for external affairs at Volunteers of America, which has paid Patton Boggs — Washington’s most lucrative lobby shop — nearly $200,000 to lobby on the charitable deduction and other issues in the past year. “Of course people want to say they are giving out of the goodness of their hearts, and of course they are, but the tax deduction makes our hearts larger and our goodness even better.”
Obama has proposed capping the value of deductions for individuals earning more than $200,000 ($250,000 for families) at 28 percent, regardless of their tax bracket. This would include deductions for mortgage interest and state and local taxes, along with charitable contributions.
Currently, the tax code allows people who itemize deductions to deduct their charitable contributions at their maximum marginal tax rate. So, for example, if someone in the highest tax bracket — now a 35 percent tax rate — gives $100 to charity, the donor saves $35 in taxes. If the deduction were capped at 28 percent, the donor would save only $28.
Capping deductions at 28 percent — including those for charitable contributions, mortgage interest and state and local taxes — would raise $574 billion in new federal tax revenue over 10 years, according to White House estimates.
Obama has dismissed the charities’ contention that his plan would substantially damage their fundraising. White House officials, including Chief of Staff Jacob Lew and senior adviser Valerie Jarrett, have recently been telling nonprofit leaders they would face far graver danger under Republican deficit-reduction plans.
The administration sessions with the leaders of charitable groups reflect a broader strategy to marshal support from a range of outside interest groups for raising marginal tax rates for high-earning Americans. Obama has called for allowing Bush-era tax cuts on the wealthy to expire at the end of the year, while Republicans have said new tax revenue should be raised by closing loopholes and deductions. The administration’s aim is to apply pressure on House Republicans to accept Obama’s tax-rate plan.
Though many nonprofit leaders agree with Obama’s view on top-end tax rates, they have been disappointed that the president seems unwilling to drop his plan for limiting the charitable deduction.
The frustration stems in part from what some nonprofit leaders describe as a philosophical disagreement between Obama and the nonprofit sector. The president has framed the tax deduction as a benefit for the wealthy, they say, while in their view the deduction is a benefit for charities that use the money to help the needy.
Stacey Stewart, president of United Way, cited a “disconnect” between the White House and charities.
White House officials have warned that Republicans would “eliminate” the charitable deduction altogether by placing caps on total deductions and rejecting higher tax rates. But aides to House Speaker John Boehner, R-Ohio, dispute the administration’s characterization.
Some in the nonprofit sector are skeptical that capping the deduction would cause a significant change in giving at all.
“People give from the heart,” said Jack Shakely, who headed the California Community Foundation, a large nonprofit, for 25 years. “They are grateful for the deduction if they can take advantage of it, but can you imagine if you normally gave $1,000 to a university and you gave them a check for $910? You would look like a jerk, and people know that.”