Senate Finance Committee Hearing Recap

Title: Tax Reform: Incentives for Charitable Giving
Date: Tuesday, Oct. 18, 2011
Location: 215 Dirksen Senate Office Building
Senators in Attendance: Chairman Max Baucus (D-Mont.), Ranking Member Orrin Hatch (R-Utah), Tom Carper (D-Del.), Ben Cardin (D-Md.), Charles Grassley (R-Iowa), Michael Crapo (R-Idaho), Tom Coburn (R-Okla.), John Thune (R-S.D.)

• Opening Statements
• Witness Testimony
• Highlights from Q&A

Opening Statements
In his opening statement, Senate Finance Committee Chairman Max Baucus (D-Mont.) talked about the importance of the nonprofit sector and ensuring that the charitable deduction is "fair and efficient." Baucus also pointed out that individuals with different income levels give to different types of charities, specifically mentioning that high-income individuals tend to give more to health organizations while lower-income families give more to religious and basic-need charities. Baucus did not mention President Obama's proposal to cap itemized deductions, including the charitable deduction, at 28 percent for high-income taxpayers. He also had to leave the hearing to attend another hearing.

Ranking member Orrin Hatch (R-Utah) expressed "deep concern," in his opening statement, about proposals to reduce the value of the charitable deduction. Hatch said he opposes President Obama's 28 percent cap proposal and expressed skepticism about the other options for reducing the value of the deduction. "This is not the time to reduce the charitable deduction and further suppress the incentive to give," said Hatch, noting that charities may have to endure another recession and further drops in giving.

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Witness Testimony

Frank Sammartino of the Congressional Budget Office testified on a number of options for changing the tax treatment of charitable gifts outlined in a May 2011 CBO report. The options included:

• Preserving the current deduction but adding a floor (contributions below the floor, which could either be a fixed dollar amount or a percentage of income, would not be deductible),
• Extending the charitable deduction to non-itemizers, with or without a floor, and
• Replacing the current deduction with a 15 percent or 25 percent credit, with or without a floor.

Almost all of the CBO options would lead to a decline in charitable giving, although CBO staff found that the decline in giving would be less than the amount of revenue gained by the federal government for most options. CBO did find that replacing the deduction with a 25 percent credit and adding a floor would lead to increased giving and increased revenue for the federal government.

Elder Dallin H. Oaks of the Church of Jesus Christ of Latter-day Saints discussed how the charitable deduction helps religious organizations raise the private support needed to fund social services. Oaks said that the deduction should "remain unimpaired." Oaks is a former president of Brigham Young University.

Eugene Steuerle of the Urban Institute asked the committee to consider options that both increase charitable giving and increase revenue for federal programs. He said that providing a deduction for non-itemizers along with a giving floor could achieve this goal. He also urged the committee to enact policies that improve reporting on charitable giving, limit the deductibility of in-kind gifts and require charitable organizations to e-file all tax-exempt forms, such as the Form 990.

Brian Gallagher of United Way Worldwide strongly urged lawmakers to preserve the charitable deduction in its current form. He noted that the current system, which ties the deduction to a donor's marginal tax bracket, is simple and easy to understand, whereas the president's cap proposal and other deduction proposals would add complexity to the tax code. Gallagher also said reducing the value of the charitable deduction would mean reduced services, hurting those most in need of these vital services.

Roger Colinvaux, a professor at Catholic University and former staffer at the Joint Committee on Taxation, encouraged the committee to examine what organizations or purposes should be eligible for the deduction, although he acknowledged such a discussion would be a "heavy lift." If the committee decides to raise revenue through the current deduction structure, Colinvaux said, enacting a floor underneath the charitable deduction would be the "best fit," followed by President Obama's proposal and a full-scale change from a deduction to a credit.

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Highlights from Q&A

• Sen. Hatch asked each witness if President Obama's cap proposal would cause a drop in donations and whether they would agree that now is not the time for Congress to adopt such a policy. All of the witnesses agreed that giving would decline under the proposal. Steuerle said that Congress should consider policy that would increase giving and revenue. Colinvaux said that charities favored by high-income taxpayers would likely receive less, which may or may not be a good thing.
• Sen. Ben Cardin (D-Md.) said that lawmakers should continue to protect the vital partnership between government and the nonprofit sector. He also expressed concern about abuses related to the valuation of noncash gifts, such as property, household goods and clothing. The witnesses generally supported efforts that balanced curbing noncash valuation abuse with the need to keep administrative costs low for charities.
• Sen. Charles Grassley (R-Iowa) voiced opposition to the president's cap proposal, noting that high-income taxpayers are more sensitive to changes in tax incentives. He also urged Chairman Baucus and Ranking Member Hatch to hold further hearings on reforming the charitable sector. In particular, Grassley voiced concern about supporting organizations and public charities that accumulate assets but are not subject to payout requirements. He specifically mentioned university endowments as an area of concern.
• Sen. Tom Carper (D-Del.) asked each witness to indicate whether he or she preferred the president's 28 percent cap proposal or the president's Fiscal Commission proposal to replace the deduction with a 12 percent credit. Because of time limits, only Sammartino from CBO had an opportunity to answer the question. While he did not indicate which proposal he preferred (CBO did not review the exact proposals in its report), he noted that lawmakers should consider the entire tax code when evaluating the fairness of proposals. The other witnesses said they would offer their answers in writing.
• Sen.Thune (R-S.D.) signaled his support for preserving the charitable deduction and said that reform proposals should not impair charities and the vital work being done by charitable organizations. He also said that potential reforms to the deduction should be examined in the context of comprehensive tax reform. Thune specifically asked if CBO had examined how the various deduction reform proposals would affect the 13 million people employed by charitable organizations. Sammartino said that CBO had not examined how any of the proposals would affect jobs in the sector.
• In response to a question by Sen. Thune, Brian Gallagher noted that countries around the world are trying to figure out how to replicate the charitable deduction in their respective tax systems. Gallagher said that he finds it ironic that lawmakers are trying to roll back the benefits of the current deduction-based system in the United States while other countries are looking to the U.S. system as a model.
• Sen. Hatch asked witnesses for their thoughts on having Congress determine which organizations or causes are "charitable." Both Elder Oaks and Gallagher expressed serious concern about the idea of incentivizing giving to particular charities over others. Gallagher noted that charities such as arts organizations play a vital role in society and do promote and support programs that serve low-income individuals.

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