This piece originally posted on Mauldin Patch before the 2012 election
It is very clear that in the 2012 presidential election, people have two clear, very different, paths that they can take the country down. Whether one path is better than another, as a whole, is a topic that I’m not going to get into – because I don’t need a thread of comments yelling incoherent stats and unfounded opinions at me and I really don’t care who you vote for, as long as you vote and understand what you’re voting for. Which leads me to the topic of this post: Charitable Deductions, and the Candidates that Hate Them.
When you cast your vote in November, you’re voting not just for an individual, but an entire political platform that, you hope, will come to fruition. This election’s topics are wide, varied and steeped in passionate politics. From job growth, to healthcare, to gas prices; there is a long list of American strifes that Fmr. Gov. Mitt Romney and President Barack Obama are having to face. Tax policy has been among that list and I’d like to highlight one component of the US Tax Code that often gets overlooked, but affects 10% of the nation’s workforce — the charitable deduction.
For 95 years (since 1917), the charitable deduction has been a cornerstone of our tax code in the US. Created as a way to reward individuals for helping out their community and support the charities of their choice, the Revenue Act of 1917 created, possibly unbeknownst to its creators, a platform from which charitable contributions skyrocketed – building new schools, feeding the hungry, helping the homeless, transforming cities into cultural hubs and advancing the mission of every nonprofit in the country. In fact, in 2011 $298.4 billion was contributed by individuals to charities in this country –up 4% from 2010. But, at the hands of both presidential candidates, charities are at risk of losing some serious support after the election.
So, on to the good stuff…
When President Obama unveiled the American Jobs Act of 2011 last September, amongst the proposals was a cap for itemized deductions at 28%. This meant that every American who itemizes their taxes could only deduct a maximum of 28% the value of their individual income from their taxes. This number would include mortgage deductions, interest deductions and charitable deductions. The revenue “re-gained” by the US government from this cap is projected to be $450 billion over 10 years. The American Jobs Act has yet to pass Congress.
In his FY2013 Proposed Budget, the President included a proposal to impose this same 28% cap on all households making $250,000+ or individuals making $200,000+ per year. This was the fourth consecutive time the White House has proposed this cap.
What does President Obama’s 28% cap do to charities? The main effect this cap will have will be lower giving levels across the board. When a person can only itemize up their deductions up to a 28% value of income, their priorities become things such as mortgage payments, interest deductions, and education costs. And rightfully so, any normal person would be sure to include the items they have to pay for first before itemizing those things that are in addition to their worldly commitments.
For example, if I were a rich man (Fiddler on the Roof anyone?) and I owned properties around the country for either investment sake or personal use, I would be a fool if I didn’t deduct the mortgage interest payments I’m making on my many properties off of my taxes. Let’s say those mortgage interest payments along with other investment tax breaks add up to 15% of my 28% cap. But then I’ve got the kids’ college expenses, another 7%, and healthcare deductions, another 3%. I’m up to 25% of my 28% cap – leaving me only 3% of my income to donate, that I can receive a deduction on, to my local arts center, food bank, shelter, or hospital. Sure, I could afford to donate above and beyond the 3%, but I’m a smart business guy, why would I give my money away without having at least some kind of reward?
Make sense? If you put a percentage cap on deductions, charities loose money. And when charities loose money, your community suffers.
Now on to Mitt Romney. I’ll be totally honest with you – with Romney’s tax plan (one that he can’t seem to nail down yet), charities will suffer more than under Obama’s plan. Or rather, there are more ways for charities to suffer. Here’s how it happens:
“You could say everybody’s going to get up to a $17,000 deduction; and you could use your charitable deduction, your home mortgage deduction or others – your healthcare deduction – and you can fill that buck, if you will, that $17,000 bucket that way. Higher income people might have a lower number.”
That was Mitt Romney on October 1, 2012. Instead of a percentage cap on deductions, Romney is proposing a flat monetary amount on deductions. The logic behind his policy makes some sense – make a basket and once you fill it, you don’t get any extras. But there are some MAJOR flaws in this proposed policy.
First of all, as stated before, the “1%” of America deduct over $170,000 every year already. The top 0.1% of the tax bracket deducts a whopping $774,971 on average (2011). In fact, those households in the fourth quintile of the tax bracket (those making an average of $93,800 [2009 data]) deduct an average of just over $19,000 – already over Romney’s proposed limit. (TPMDC)
During the first Presidential Debate, Romney changed that $17,000 to a more ambiguous “$25,000, or $50,000”. So really, he has no idea what this magic number will be yet, but regardless of the value of the cap on deductions – the effects will be the same, just for different people.
To put that $17,000 figure into perspective, “the average married, joint-filing taxpayer who itemized it 2009 claimed $20,464 in itemized deductions, $17,329 of which was consumed by…home mortgage interest ($10,365), State & Local income taxes ($3,667), and real estate taxes ($3,287).”So the average household that itemizes its taxes is, on average, already over Romney’s proposed plan – and that’s before any charitable deductions.
Romney’s plan would give people almost no incentive to donate to charitable organizations. Because, as illustrated in the “if I were a rich man” example above – why would I donate enough money to endow a chair at a college, build a new hospital or sponsor a major event if that donation was going to exceed my government mandated cap on tax deductions?
Additionally, Romney plans to eliminate government support for agencies such as the Corporation for Public Broadcasting (Big Bird & PBS), the National Endowment for the Arts and the National Endowment for the Humanities; declaring that the private sector should support these types of programs. But the fact remains that among high-income households, 71.6% of them donate to arts organizations and wealthier households are 5 times more likely to give to education. How in the world do you expect those individuals that can afford to pick up the slack where government funding fails, if they cannot deduct those charitable donations from their taxes?
The charitable deduction is a HUGE incentive for people to give – especially amongst those who itemize their taxes. Here’s a fun fact supporting that statement – 20% of all online charitable donations come on December 30 & 31. But beyond the deadline for donations, those who itemize their taxes have repeatedly cited that the charitable deduction is a major factor in determining whenthey give and how much they give. It’s true that almost any tax code change for charitable deductions will in no way stop people from donating, but it will have an effect on the size of those gifts and how often they are given.
The best example I can give applies to everyone, regardless of your tax bracket. Let’s say you want to donate $12,000 to your Church because it recently burned down due to a lightning strike. Under both Obama and Romney’s plans, you’re best option to do so will be to donate $3,000 every year as opposed to one lump sum. And if you know anything about accounting or finance, you know that money is worth more right now than it will be tomorrow (“time value of money”), meaning the $12,000 given in one lump sum has a greater effect than the $12,000 given over four years.
As a nonprofit director, a nonprofit board member, and a huge nonprofit advocate – all I ask is that you understand the policies of the candidates running for office this year, and in particular this policy. This issue matters; it matters a lot more than most people understand. Nonprofits are consistently on the front lines of human need, community need and national pride and must be supported. I’m not saying you should choose any particular candidate. The fact remains that any change in policy is going to come under scrutiny and utlimately have to be passed by Congress. I just want you to be aware of where each candidate stands on this issue so that you can make an informed decision on which candidate you think will be best for our nation.
Don’t forget to vote – November 6!