Should non-profits worry about deduction caps?

Earlier this year the President proposed to make a down payment on paying for health care reform by capping the economic value of itemized deductions at 28% for high-income taxpayers. Charities were aghast at the idea, because they know, as the politicians don't, that there will be a behavioral response, that the most of the "revenue enhancement" produced by such a change will be borne by the charities. They know that when pitching high-dollar contributions to the wealthy, they always show the "after tax cost" of making a large donation. The lower the real "cost" of a major donation, the easier the sale is to the rich prospective donor. Capping the value of the deduction reduces the spread, and will make it harder to secure big gifts. Rich people focus on after-tax costs—that's how they got rich in the first place.

Politicians, on the other hand, seem to believe that all philanthropy should be motivated solely by charitable impulses. I suspect that in their world, the charitable deduction itself is pointless, and should be abolished.

The administration is trying to calm the worried charities, reports Tax Notes Today ($).

Gains in the S&P 500 over the last few months are more than enough to offset the adverse effect that President Obama's 2010 budget proposal might have on charitable giving, said Jeffrey Liebman, executive associate director of the Office of Management and Budget, on May 27.

Yes, the stock market gains since the March lows are impressive. No, I don't think that the wealthy will consider these gains sufficient to cause a spurt in charitable giving. The frame of reference for the wealth effect has to take into account the highs of 2007, not just the recent lows. And it has to take into account the collapse of real estate values as well. I don't buy Mr. Liebman's glib assertion.

Still, two more plausible siren songs were pitched to charities to get them on board at the same Washington, DC meeting. The very real short term benefit to fundraisers of a loss of tax benefits scheduled at a future date (the President wants to begin the cap in the 2011 tax year) is that wealthy taxpayers will undoubtedly accelerate their donations to take advantage of higher tax benefits while they can. Now, suddenly, tax changes do have behavioral effects!

Longer term, nonprofits are being squeezed by health care costs as hard as everyone else. Some $48 billion is spent by nonprofits on health care for their employees, coming in at 4.6% of total expenditures. They would like to see that cost go down—would that be a consequence of a federal takeover of the health care industry?

I dunno—is the cost of buying a new Chrysler vehicle projected to fall dramatically?

The Senate has already passed a resolution rejecting the caps, but that is not likely to be the last word on the subject.