Charitable groups fear tax victory in ‘fiscal cliff’ deal will prove hollow

Charitable groups notched a big victory in the year-end tax deal but say the fight to preserve their tax deductions is only beginning.

The “fiscal cliff” agreement preserved the tax deduction structure for charitable contributions, a policy that both Republicans and Democrats have sounded open to changing in recent months.

{mosads}In fact, the deal signed into law would actually help spur more donations, according to a study by the Tax Policy Center. But charitable groups say they fully expect their deduction to be under threat in the weeks and months to come.

“We are viewing this as an interim victory,” Steve Taylor, senior vice president at United Way Worldwide, said about the fiscal cliff deal. “We recognize that it was really good for us, but we also didn’t spend any time celebrating.”

Negotiations over the debt ceiling and looming automatic spending cuts have yet to heat up, nonprofit officials say, and Democrats and Republicans still remain deeply divided over how to proceed on fiscal matters.

“We don’t feel like anything’s secure for this year,” said Alison Hawkins, the director of external affairs for the Philanthropy Roundtable, told The Hill. “The sequester cuts, the debt ceiling — we view all of those as potential threats to the charitable deduction.”

The fiscal cliff deal is just the latest twist in a debate over the charitable deduction that has lasted throughout President Obama’s term in office, with the administration consistently pressing to limit how much of a deduction wealthy taxpayers can take.

At the same time, the White House pressed charitable groups to stand with Obama during last year’s battle over raising tax rates on the highest earners, and charitable groups have been fighting against deduction caps they say would limit donations from the wealthy.

In addition to preserving the charitable deduction, the tax deal raised rates on family income above $450,000 a year to 39.6 percent, and increased the top capital gains rate to 20 percent.

Those changes, the Tax Policy Center says, are projected to increase charitable giving by $3.3 billion, or just over 1 percent, in 2013. Under current law, higher tax rates mean a healthier deduction for taxpayers who itemize.

The Tax Policy Center also said that another provision in the cliff deal that worried some non-profits — the reinstatement of the so-called “Pease” limitation on deductions — would have “negligible effects on the tax incentive for charitable giving.”

The Pease limitation cuts itemized deductions for taxpayers over a certain threshold — $300,000 for couples. Pease was reinstated, along with a reduction of personal exemptions for the wealthy, after being phased out in the 2001 tax deal.

But Hawkins said that her group would seek an exemption for charitable donations from the Pease limitations, and that reinstating Pease could set the stage for further chipping away at deductions.

“Anything that could potentially tinker with or limit deductions, we’re opposed to,” she said.

Taylor said United Way Worldwide had expected Pease to come back, and predicated that the combination of a preserved charitable deduction and higher tax rates would lead to more robust donations this year.

But Taylor also said that local United Ways had already expressed concern about the Pease limitations, and that the mere enactment of a limit on deductions could lead to fewer donations. Local United Way officials are scheduled to come to Washington to discuss tax issues with policymakers next month.

Charitable groups are also concerned that the cliff deal checked off some of the more high-profile proposals, especially on the tax side, with negotiations over the debt ceiling, the sequester cuts and even a government spending agreement still looming.

Almost immediately after the recent deal, Obama started pushing for further tax changes that he said would take away deductions that are available to the rich, yet out of reach for most taxpayers.

“I guess to the extent that Congress may be unwilling to revisit tax rates, that does seem to put limits on deductions even more in the forefront,” Taylor said.

And with both Democrats and Republicans continuing to press for changes to the tax code, albeit in different ways, charitable groups say they have no idea when their fight will be over.

The White House, for instance, has said its proposal to cap deductions at 28 percent, instead of the top marginal tax rate, is about fairness as well as finding new revenues.

“If they continue to put forward the 28 percent proposal, we’re not going to consider this over,” Hawkins said.

Taylor said that he felt more confident about congressional support for the charitable deduction. But he also acknowledged that the deduction could be on the chopping block until the debate over tax reform is done, and Washington’s search for revenue is over.

“I am suspecting that we will be working on this at least through the 113th Congress,” Taylor said.