Rep. Griffin Thinks Government Funding for Nonprofits Makes Them Dependent and Lazy

Good coverage in the Chronicle of Philanthropy of last week’s House Ways and Means Committee hearing on the charitable deduction.

It was interesting to read that Rep. Griffin is now employing the “takers vs. makers” rhetoric when describing nonprofit organizations’ relationship to government funding:

Some lawmakers hinted they were itching to explore nonprofit issues beyond the charitable deduction. Rep. Tim Griffin, Republican of Arkansas, said he was shocked to learn that some nonprofits in his district rely on government money for up to 80 percent of their revenue.

He questioned whether it would be more efficient to encourage people to give to them directly, rather than to pay taxes to the federal government, which then trickle down to the nonprofit through the state and county.

They’ve become dependent nonprofits,” he said. “The tools in the philanthropy tool box rust. They don’t have to court big donors, and they love that. They don’t have to have annual dinners, and they love that. They just get that big check from the federal government.(my emphasis)

Analogy of the Day

From the Chronicle of Philanthropy:

Beth Noveck, the former U.S. deputy chief technology officer for open government and a co-author of the Aspen Institute report, likens proposals to create a public database of nonprofit financial information to recent efforts by the U.S. Department of Health and Human Services to make government-collected data on health trends available online.

By making such data publicly available, researchers can, for instance, map the spread of infectious diseases in real time, says Ms. Noveck.

When it comes to nonprofit finances and accountability, if your first thought is “malaria,” then I’m guessing you are not too confident that things are going well.

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.

The Politics of the Charitable Deduction More Important Than the Numbers

(Important Updates Below)

Less than a month ago, Democrats were talking about the possibility of embracing some kind of tax deduction cap as part of a potential fiscal cliff-avoiding deficit reduction agreement, an idea that President Obama had himself been floating for some time, although it’s never gone anywhere with Congress. (Specifically, the President has proposed was capping itemized deductions, including the one for charitable contributions, at 28% for individuals earning more than $200,000 a year and married couples earning more than $250,000 a year.)

But Friday, Jason Furman and Gene Sperling, two of President Barack Obama’s top economic advisers, posted an article to the White House blog that is critical of placing a cap on itemized deductions—in this case, a proposal to place a fixed $25,000 cap on deductions. They argue that such a cap would not raise the revenue proponents claim, and would have too much of an adverse impact on middle-class families and on charitable donations.

Some have raised issues with their analysis, but I wonder if that matters—it seems to me that what’s most important about their post is not the numbers, but the political message that it’s sending.

Clearly, something has changed since just after election, when Democrats were talking about deduction limits being part of a bipartisan solution to deficit reduction. Interestingly, Furman and Sperling make no reference to the President’s earlier 28% cap proposal—which would obviously work differently—but I don’t get the feeling that this proposal is coming back either. I think that what’s changed is that the administration is digging in its heals on raising tax rates, and so they’ve decided to scrap the idea of raising revenue by capping deductions as a potential compromise.

Which is another way of saying that, politically, it seems increasingly unlikely that the charitable tax deduction is in any danger. Capping or getting rid of it has never been a popular idea anyway, and now it appears the administration is taking it off the table in their push to force Republicans to accept tax rate increases as part of a deal. (But see important update below—turns out that the 28% cap is not off the table, as the White House has since released a more detailed cirtique of dollar caps that includes a renewed endorsement of the President’s 28% cap proposal.)

I’m really interested in knowing whether anyone else thinks I’m reading this correctly. I’ve seen a few comments about the Sperling/Furman post, but haven’t seen any discussion as to whether this is a complete abandonment of the idea of any kind of deduction cap being part of the deficit deal.

UPDATE 12/4/12: An article yesterday in InvestmentNews discusses the difference between a dollar cap on deductions (which is what Sperling and Furman were analyzing) and the percentage cap that the President had proposed earlier. Since  I noted above that a percentage cap would work differently but didn’t explain how, I thought I would pass it  along:

Especially for higher-dollar donors, the dollar cap would be much, much worse than a percentage cap of 28%,” said Evan Liddiard, tax policy expert at Urban Swirski & Associates LLC, who advises on charities. “We should be focused on all kinds of caps, but particularly dollar caps because they will have the most devastating impact on the nonprofit community.”

With a dollar cap on deductions, it’s expected that Americans would first use up their allotted tax savings with items such as their mortgage interest and state taxes, and that there would be none or just a small amount left for giving tax-efficiently to charities, said Steve Taylor, senior vice president for public policy at United Way Worldwide.

“Wherever you draw that line, you effectively eliminate the charitable deduction for some class of donors,” Mr. Taylor said.

To compare the impact of the two proposals, Mr. Liddiard looked at how a married couple with two children earning $400,000 and contributing $40,000 to charity would be hit. The 28% cap would provide $4,500 less in tax savings for that family, which under today’s law can deduct 31%.

That same family would lose about five times that amount in tax benefits under the $25,000 cap (assuming that the family qualified for a total of $91,000 in deductions for charity, mortgage interest, and state and local taxes). The $66,000 spent beyond that cap would translate to about $22,000 less in tax savings, Mr. Liddiard said. (my emphasis)

For a family making $3 million and donating $300,000, the 28% cap would take away $42,000 of their tax savings, assuming that they could take the maximum 35% deduction. The $25,000 cap would wipe out more$200,000 of their tax benefits, assuming that they claimed a total of about $600,000 in deductions.

However, the article also quotes Howard Gleckman, a resident fellow at the Tax Policy Center, who points out that the two approaches are “difficult to compare,” because everyone’s tax situation is different.

I still think that the White House Blog post represents a pull-back on the whole idea of capping deductions further. Again, the article never once mentions the President’s earlier proposal.

UPDATE 12/7/12: As noted above, after not talking about for a while, The White House is again pitching the President’s 28% cap proposal, (during a series of calls with nonprofit leaders today, along with in a new report from the National Economic Council), so the idea of a percentage cap, at least is definitely not off the table. The report makes a more detailed argument as to why a dollar cap is be a bad idea, while making a reinvigorated pitch for the President’s 28% deduction cap.