Proposed Non-Itemizer Deduction Raises Concerns

by Guest Blogger, 2/28/2002

Instead of questioning the wisdom of the tax cut enacted last summer or proposing to delay its implementation until support for key domestic investments is provided -- which is what should be done -- we now have to weigh an acknowledged valuable tax break, the non-itemizer deduction, against vitally needed federal programs.
The Lieberman-Santorum faith-based bill, the Charity Aid, Recovery, and Empowerment (CARE) Act (S. 1924), represents a positive compromise from the Bush charitable choice proposals. Yet the provision to allow taxpayers who do not itemize to take up to a $400 deduction ($800 for couples) for charitable contributions raises some concerns. While this sounds very good, in today's economy it may prove yet another straw that is breaking the back of spending on domestic programs. For those in the 15% tax bracket, this cut translates into a $60 tax break for individuals giving the maximum. While the CARE act is more responsible than the charitable choice bill passed in the House last year (H.R. 7), the cost of ten years is more than $40 billion. Because the cost is so high, the Senate bill proposes the tax incentives for only two years, or roughly $8.4 billion, with the knowledge that the provisions will likely be extended after that.

At the same time, the President has proposed a budget that takes a huge whack out of domestic discretionary spending, the very component of the federal budget on which nonprofits are heavily dependent. According to the Senate Budget Committee, there would be a cut of 6.2% for domestic programs (other than homeland security) when compared to what is needed to maintain the current level of programs and services. While not all the cuts will materialize, nonprofits already have taken a huge hit through the tax cuts enacted last summer, such as the phasing out of the estate tax. The estate tax would have generated an average of roughly $34 billion per year for the rest of the decade, roughly two times the size of the cuts that are proposed for domestic spending.

Against this picture of budget cuts, does the non-itemizer make sense? Independent Sector, a leader in advocating the non-itemizer, points out that nonprofits will get $1.15 for every $1.00 the government loses in revenue. However, there are a series of questions that need to be asked:

  1. Will the non-itemizer really generate that much in new contributions, or is this a way to give those who are now contributing a way to receive a tax break? No one knows for sure how much new giving will occur, but a number of tax experts have raised this concern and the tax-writing committees are listening.
  2. Even if it does generate new contributions, which nonprofits would really benefit from the non-itemizer deduction? Most experts seem to acknowledge that religious congregations will benefit, but it is not clear who else will.
  3. Will the non-itemizer deduction be as difficult to administer as tax experts say? Past IRS employees and others in the tax-writing committees argue that the non-itemizer is a prescription for fraud, and additional resources will need to be used to prevent this.
  4. Is this an appropriate substitute to direct funding of services? Conservatives want to downsize the government and shift responsibility from Washington to local control and private, voluntary initiative. This shifting of funding from government to private donors is unlikely to compensate for diminished ongoing federal support of key programs

There are ways to approach the non-itemizer deduction that would reduce its cost and target the benefit to new or increased contributions. For example, the deduction could be limited to what is given over a set floor amount. This approach was recommended in The Nonprofit Agenda: Recommendations to President George W. Bush to Strengthen the Nonprofit Sector, which was based on results of a national survey of nonprofits and developed by an Advisory Group of state and local nonprofit leaders. They recommended that, "the deduction threshold should be high enough to encourage giving but low enough to allow broad participation and benefit the 49% of households with taxable incomes of less than $30,000 a year."

Instead of questioning the wisdom of the tax cut enacted last summer or proposing to delay its implementation until support for key domestic investments is provided -- which is what should be done -- we now have to weigh an acknowledged valuable tax break, the non-itemizer deduction, against vitally needed federal programs. The real solution is addressing the tax cuts from last summer. Until critical domestic spending issues are addressed, the non-itemizer deduction does not make sense.

Read OMB Watch's full analysis of the trade-offs involved in the decision about the non-itemeizer.