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Short-Changing Charities
SOURCE: Forbes
Daniel Indiviglio
February 26 2009

Although President Barack Obama hopes to help the poor by providing government-regulated health care, his plan to pay for it might actually cause those same people harm.

In his preliminary budget, Obama says he plans to pay for his health care reform by increasing the burden on those he considers "rich," families earning more than $250,000. In particular, taxpayers would only be able to take itemized deductions against a 28% tax rate, instead of the actual rate they paid, which in 2011 could be as high as 39.6%. That means they'd still be paying nearly a 12% tax on items they were supposedly allowed to deduct.

But the rich aren't the only ones who could lose under this plan, critics say. Those who benefit from the wealthy's deductible charitable contributions could also feel the pain, as the rich cut back on giving.

"It's a terrible thing for charities," says Conrad Teitell, a tax lawyer whose client roster includes the Salvation Army.

Obama's plan lessens the incentive for the rich to give, because it lessens the proportion of those donations that will be given back to them when filing their taxes. Sure, donors will still get that warm and fuzzy feeling for helping a charitable cause, but if they were not hoping to get some tax benefit as well, then they would not have bothered claiming these deductions.

Imagine someone who makes $1 million in taxable income and gives $100,000 per year to charity. Currently, that contribution would reduce his taxes by $35,000, or 35% of what he has donated, because that's his tax rate. Under the Obama plan, this person would see only a $28,000 cut in his tax bill, or 28% of his donation. In other words, this person currently has a 25% greater incentive to be charitable than he would under Obama’s new tax scheme.

Another way to think about charitable giving is by considering the effective amount spent by donors. If the person mentioned above wanted to spend $65,000 out of pocket on charity, he could do so by actually donating $100,000 under the current tax system, since he gets $35,000 back on his taxes. But under the Obama plan, if he were willing to spend $65,000 out of pocket (including tax savings), he would donate $90,278. The charity would lose nearly 10% because of the new tax policy.

The budget request could not come at a worse time for nonprofits. According to Indiana University's Center on Philanthropy, in the second half of 2008, nonprofits have been in the worst fundraising climate for U.S. charities in more than decade. Gifts of $1 million or more fell by 33% in the second half of 2008, compared to the same period in 2007.