A letter to the nonprofit community from OMB Watch and the Center on Budget and Policy Priorities expressing concerns about the proposed non-itemizer deduction in the Faith-Based charities bill. We are writing to discuss a significant problem posed by one of the major provisions of the "faith-based" legislation recently introduced by Senators Lieberman and Santorum and to advise strong caution in response to requests to endorse the legislation as a whole. In a nutshell, the legislation contains an expensive tax provision that would cost approximately $40 billion over the coming decade. Placed on top of the tax cut enacted last June and the large defense and homeland security increases certain to be approved, the likely effect of this provision would be to lead to still fewer resources for--and larger budget cuts in--important domestic programs in the years ahead. The provision in question would provide a deduction on charitable contributions of up to $400 per person ($800 for married filers) made by people who do not itemize their deductions. Encouraging charitable deductions is desirable, and such a tax cut would be distinctly preferable to most of the tax cuts enacted last year. But the proposal is expensive, and with the budget picture we currently face, now is the wrong time for it. Under the Lieberman-Santorum bill, it would be in effect for two years at a cost of $8.4 billion. Once in effect, however, it would surely be extended; those opposing its extension would be accused of favoring a tax increase and of opposing charity. When extended, its cost would be approximately $40 billion over ten years. (Despite its cost, the measure would not do much for the large majority of non-itemizers who are in the 10 percent or 15 percent tax brackets; for example, single filers in these tax brackets would get a tax reduction of only $40 or $60 for the maximum $400 in charitable giving). We are particularly concerned about the effect on people who are most in need and on the government programs that serve them. Joint Tax Committee analyses suggest that non-itemizers already make about $25 billion a year in charitable contributions. Hence, a large share of the cost of this proposal would go to reduce taxes on the basis of contributions that already are made. The proposal would also spur new contributions; the exact amount of such contributions cannot be predicted with certainty. Some studies estimate the revenue loss to the government would exceed the amount of new contributions. Other studies suggest the charitable contributions might be modestly higher than the revenue loss. In either case, a sizeable share of the new contributions would likely go to local religious congregations and cultural institutions such as museums and symphonies. If the government revenue losses are offset by cuts in programs, low-income families and individuals are very likely to come out behind. More to the point, voluntary contributions to charities should never serve as a substitute to government funding of programs. Had we not enacted last year's tax cut--or if the non-itemizer proposal were to be paid for by scaling back a part of that tax cut-- we would reach a different conclusion. We also might have a different view about a non-itemizer proposal that was designed so it would be substantially less costly and also more efficient in spurring new contributions. But at the present time and in the current budget environment, we believe enactment of the non-itemizer proposal that is contained in the Lieberman-Santorum bill would do more harm than good. We believe a number of other elements of the Lieberman-Santorum bill warrant support and that enactment of the legislation without the non-itemizer deduction would be a positive step. We believe, however, that achieving such a result entails withholding support from the legislation as a whole, as distinguished from parts of the legislation. Sincerely, Gary D. Bass Robert Greenstein OMB Watch Center on Budget & Policy Priorities P.S. The Center will be publishing an analysis of the non-itemizer deduction. Check www.cbpp.org early next week for it. OMB Watch has an analysis available here.