The Chronicle of Philanthropy has reported on a recent New York law that limits the amount that high earners can deduct for contributions to charity. For New York state income tax purposes, taxpayers with more than $10 million in annual gross income can only deduct 25 percent of their contributions to charity. This law is lower than the 50 percent limit that applies to all taxpayers.
The law is only expected to affect 3,500 people, but could raise up to $100 million in this year alone. The added revenue will bolster New York’s sagging budget, which is currently in a crisis. But, as is often the case with the tax laws, the benefit to one group comes at a detriment to another. In this case, nonprofits stand to lose when state law chips away at their donors’ tax incentive for giving.
Heiress and philanthropist Abigail Disney, who seems to be becoming quite the tax policy expert, has decried the tax, believing that it will cause a significant decrease in charitable giving:
The last thing on earth charities need is a disincentive from the government to people who are their donors, especially their biggest donors. Because the biggest donors are the people who are least hurt by this economic downturn and more likely to be there every year with the kind of general- support money and reliable money that these organizations need.
Many charities and charity advocacy groups fear that the New York law could set a trend in states that are also dealing with budget shortfalls. Congress might also follow suit to help finance President Obama’s health care initiatives.
The Obama administration has defended proposed deduction caps, believing that they will have little real impact on charitable giving. In a White House press briefing, Peter Orszag, director of the White House Office of Management and Budget, was asked whether the caps on charitable contributions would chill philanthropic giving. His response:
I really don’t think so. I think what drives charitable contributions is overall economic growth … It’s … not done for a tax incentive, but rather out of benevolence or some other related desire.
Despite the White House’s dismissive tone, I believe that the concerns voiced by the charities are justified. The White House’s view that American’s give purely out of disinterested benevolence can only come through rose-colored glasses. And anyone who believes that tax incentives do not contribute to philanthropic giving has never worked in the charitable planning arena. When estate planning clients are faced with a “give it to charity or give it to Uncle Sam” scenario, many chose the former. The increasing popularity of charitable giving techniques like charitable lead trusts and charitable annuity trusts are driven primarily, though not exclusively, by tax incentives. Any tinkering with this tax structure will have an effect. The only question is: how much?