Tuesday, July 30, 2013

The Future of the Charitable Deduction -- Expanding the Pease Amendment?

Tax reform and its potential impact on charities has been a point of discussion for some time now.  In many ways, it seems those in the nonprofit sector view the options as being to keep the charitable deduction or eliminate it entirely.  Realistically, though, most proposals that affect the deduction for charitable donations represent a middle ground.  The current approach by the Senate Finance Committee is to accumulate a laundry list of possible alternatives to eventually winnow down, with the hope of reaching a consensus.  The list of proposals examined thus far by the Senate Finance Committee is summarized here.

Presuming the goal of reform is to raise tax revenue and simplify enforcement while maintaining incentives for charitable giving, several of these proposals are worthy of consideration.  As I've discussed before, I'm particularly interested in proposals to close the loophole for donations of appreciated property – if that is not low hanging fruit, I don't know what is.

However, before getting to an in depth discussion of the possible avenues for reform, one additional thing may be worthy of consideration -- an expansion of the Pease Amendment.  Not only has that not been mentioned, but the Pease amendment is discussed in the Senate Finance Committee's list only as something to be eliminated.  So, why do I think an expansion is worth considering?

Many of the proposals seeking to raise revenue clearly undercut giving incentives, by imposing a cap or elimination of the deduction or limiting the types of donations/nonprofits to which the deduction applies.  Sometimes the conflict is apparent, such as with Obama's proposed cap on the percentage savings from itemized deductions to 28% – the reduced tax benefit from giving (and resulting rise in revenue) is directed at high-income taxpayers, those whose giving may be most sensitive to the tax incentive.

The Pease Amendment works differently - rather than capping itemized deductions, it introduces a floor depending on income levels.  That is, instead of saying your deduction is limited to a particular dollar amount it instead says that you only get a deduction for amounts given above a certain threshold.  Many have misinterpreted this as a dollar limit on deductions, but the subtle difference is critical.  For those whose giving levels are sufficiently high, the Pease Amendment does not affect the marginal incentive to give – once the floor has been met, each additional dollar of giving gets full tax benefits.  Yet, because of the floor, total deductions are less and, thus, revenues are higher.  In short, the Pease Amendment offers the potential to alter the charitable deduction in a way that increases tax revenues without reducing taxpayers' incentives to give.  Of course, the particulars about how high the floor should be, what income levels should trigger it, and which deductions it applies to are up for debate. But first, we must agree that the basic idea behind the Pease Amendment may be worth revisiting.

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