Politics of the Charitable Deduction, Part II

(Updated below)

Earlier today the White House released a new report from the National Economic Council) that argues forcefully against the idea of a fixed-dollar-amount cap on tax deductions for taxpayers at all levels of income as a viable deficit-reduction strategy. This follows a White House blog post from last Friday by Jason Furman and Gene Sperling, two of President Obama’s top economic advisers, that was also critical of the idea; and a story in The Washington Post, also from last Friday, about a document “being shared with congressional Democrats and other White House allies” that contained “a rebuttal to Republican arguments that eliminating loopholes and deductions could raise just as much money for deficit reduction as raising the income tax rates on top earners.”

In all cases, the administration’s analysis has been focused on a $25,000 fixed-dollar-amount cap on deductions. (I don’t believe the Republicans have actually made a specific proposal yet regarding a cap on tax deductions, other than general support for the idea of limiting deductions and loopholes.)

In addition, the administration’s initial set of objections to the idea of a fixed-dollar-amount cap never appear to have mentioned the President’s own longstanding proposal to lower the cap on deductions at 28% for those earning more than $200,000 a year (and married couples earning more than $250,000 a year), which led me to speculate whether the administration was quietly tabling that idea as well. In the Post article from last Friday, for example, there was a specific reference to a White House desire to “preserve tax breaks for charitable giving,” and no mention of their earlier proposal that would do just that (although in a much, much less substantial way than a fixed-dollar-amount cap would do).

But by late yesterday, just as nonprofit interest groups were leaving town after a huge lobbying effort this week to protect the charitable deduction, that 28% proposal started seeing some daylight again. Most significantly, it was specifically mentioned as an alternative in that National Economic Council report issued this morning. This report contains a more detailed argument as to why a dollar amount cap is a bad idea, (in a nutshell, they argue that it basically wipes out the charitable deduction because under a fixed-dollar-amount cap, after people take their mortgage deduction and other automatic deductions, they’ll hit or already be above the cap). But now they are also making a reinvigorated pitch for the President’s 28% deduction cap on top earners as a responsible alternative.

In an earlier post I suggested that the specific critique coming from the White House last week didn’t matter as much as the fact that the they were coming out so strongly against a cap on deductions at all, without mentioning the President’s earlier proposal. I initially thought that the absence of any reference to that earlier proposal might have meant they were backing off of it completely, which was not the case.

What’s interesting to me about all this is that the nonprofit interest groups, while obviously much more alarmed about the impact of a fixed-dollar-amount cap, (and I think the administration has made a strong case that there is in fact a big difference between a fixed-dollar-amount cap on all taxpayers and a 28% cap on top earners only) were really unhappy about the 28% cap idea when the President first introduced it. Have those groups softened their opposition? If so, is it because the administration has convinced them that the 28% cap is not going to have a significant impact, or is it because they are convinced that at least it’s not as bad as what the Republicans want to impose? (It’s also worth noting again that just after the election, both parties were talking about deduction caps, and less of a distinction was made between Romney and the President’s approaches.)

UPDATE 12/10/12: As I mentioned above, groups that represent the nonprofit sector in D.C. had been pretty clear that were opposed to any changes to the charitable deduction rules. Here is an article from The Philanthropy Journal from just after the election that summarizes this opposition.

Again, White House is now positioning their earlier proposal to limit deductions to 28% for high-income taxpayers as a responsible alternative to what essentially was Mitt Romney’s proposal to limit deductions. I’m still not clear to what extent anyone since the election is still really pushing the fixed-dollar-amount cap he proposed.