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 one provision, dealing with charitable giving, raises some concern. The bill proposes to let taxpayers who do not itemize get a tax break for charitable contributions. 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. The Senate bill is far more responsible in addressing the non-itemizer deduction than the House charitable choice bill that passed last year. Because of the cost of the non-itemizer, the House bill limited the maximum deduction to $25 for the next two years rising to $100 in 2009 (double these numbers for couples), yielding a tax break of $3.75 rising to $15 for most non-itemizing taxpayers (those in the 15% tax bracket). Given that the average giving by non-itemizers is $328, it becomes clear that this bill creates no incentive for new giving. Yet it costs $6.4 billion over 10 years as a tax expenditure without any real return to charity. The Senate bill allows taxpayers who do not itemize to deduct from taxable income charitable contributions up to $400 ($800 for couples). For those in the 15% tax bracket, this translates into a $60 tax break for individuals giving the maximum. Yet the cost of ten years is more than $40 billion. Because the cost is so high, the Senate bill proposes the tax cut for only two years or roughly $8.4 billion. This is a game increasingly used to get tax cuts passed. Make it available for a few years, knowing that the Congress will likely extend it when it is scheduled to expire. 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 that nonprofits heavily depend on. 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. Over the next decade discretionary spending would go up $428 billion or 25%. But that masks the fact that defense spending goes up $595 billion and nondefense spending drops $167 billion – that's without adjusting for inflation. While not all the cuts will materialize, nonprofits already have taken a huge hit through the tax cuts that already have been enacted last summer. Moreover, because there are additional hidden costs to last summer's $1.3 trillion tax cut, it will put even greater pressure on domestic spending – and that doesn't include the additional tax cuts proposed by Bush this year. The changes in the estate tax, which included a national phase out of the tax by 2010 – 2004 for states – before it is reinstituted in 2011, is a good example. The tax is key to nonprofits both in terms of social engineering and economic justice, as well as in terms of resources to support state and federal programs and direct charitable contributions. The estate tax alone would have generated an average of about $34 billion per year for the rest of the decade, roughly two times the size of the cuts that are proposed for domestic spending. With the estate tax, in fact, we would not need to impose the domestic spending cuts and we could fully fund Head Start and expand child care for all families, for example. The changes in the estate tax will also cost states between $2 billion and $9 billion in revenue each year as the tax is phased out and then repealed. This is at a time when the National Association of State Budget Officers and the National Governors Association report that state budget shortfalls have grown to $40 billion and some states are already making cuts in human services and other programs. The estate tax repeal will also have an impact on revenue nonprofits obtain through charitable bequests and through foundations grants since bequests help to endow foundations. Yet, the President and conservatives in Congress plan to make repeal of the estate tax permanent. Nearly everyone who follows tax issues recognizes that because of last summer's changes more than one-third of taxpayers will be required to deal with the individual Alternative Minimum Tax, unless it is revised by the end of 2004 when it expires. The revision of the AMT will likely cost at least an additional $300 billion over the next 10 years. Yet the President's budget, which already has a squeeze on domestic spending, has not counted the cost of fixing the AMT in its calculations. For that matter, the President's budget also does not take into account extending some tax cuts, such as the deduction for college tuition which expires in 2005, which Congress surely will do. All of this puts added pressure on domestic spending. Now let's turn to the non-itemizer deduction. 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. But 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? The Independent Sector analysis done by PricewaterhouseCoopers indicates the non-itemizer "would encourage 11.7 million tax-filing units to become new givers..." But this was based on the Bush proposal, which was a more generous (and costly) non-itemizer deduction than the Senate bill version. Independent Sector has reported that the average giving from non-itemizers is $328, and that for those in the $30,000-40,000 income tax bracket, average giving by nonitemizers is $465. This is $65 above the $400 cap in the Senate bill, giving little incentive for new giving. No one knows the answer to how much new giving will occur for sure, but a number of tax experts have raised this concern and the tax writing committees are listening. Senators Max Baucus (D-MT) and Charles Grassley (R-IA), the chair and ranking member of the Senate Finance Committee, have raised concerns about the non-itemizer. This means it will be difficult to get the tax break passed in its current form. And if it is revised to cost less, such as what the House passed, is it even worth it? 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." 2. Even if it does generate new contributions, which nonprofits really benefit from the non-itemizer deduction? Most experts seem to acknowledge that religious congregations will benefit from the tax cut. It is not clear who else will benefit. Presumably other nonprofits that advertize, such as through direct mail, may benefit. Surely this will increase competition among nonprofits for limited funds. But will it benefit those organizations serving the hardest to serve? 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. Whether they are correct or not, it will mean that the sector will need to provide vigorous advocacy on behalf of the tax break at the same time that there are spending cuts to domestic programs. 4. More to the point, is this an appropriate substitute to direct funding of services? This is the heart of the debate. Conservatives want to downsize the government and shift responsibility from Washington to local control and private, voluntary initiative. This approach has never been so apparent as it now is with the choice the President has forced between proposed budget cuts and giving individuals more control through the non-itemizer to give money to "worthy" nonprofits. Meanwhile, even if very worthy nonprofits receive charitable contributions, it will in no way compensate for diminished ongoing federal support of key programs. Last summer, before the tax giveaway, the non-itemizer made enormous sense. At that time, there were projected surpluses – we could invest in programs that serve our communities and, at the same time, provide targeted tax cuts such as the non-itemizer deduction. But now is different. The President won his tax cuts, the economy is sluggish (if not recessionary), and spending for military and homeland security is rising. The tax cuts have put us in a bind, leaving very little for domestic initiatives. Instead of questioning the wisdom of the tax cut enacted last summer or proposing to delay its implementation until support for key domestic investments are met – 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. But until the nonprofit sector comes solidly behind that message, the $40 billion version of the non-itemizer deduction does not make sense. At least not until critical domestic spending issues are addressed.