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Charities could be losers in ‘fiscal cliff’ tax fight

Proposal would end deductions

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In the fiscal feud between President Obama and Republican lawmakers, economists agree that Washington could raise several hundred billion dollars by limiting tax deductions and closing loopholes for the wealthy, but charities likely would take a big hit in donations.

At the center of the dispute between Mr. Obama and the GOP is whether they could raise enough revenue for a deal on deficit reduction without raising tax rates on families earning more than $250,000 per year.

Some economists say revenue could be raised on the order of $1 trillion over a decade without raising rates, more than the $800 billion proposed by Republicans but short of the $1.6 trillion sought by Mr. Obama.

The nonpartisan Committee for a Responsible Federal Budget has devised three proposals that would raise as much as $110 billion per year from taxpayers earning more than $200,000 per year without raising tax rates. For example, one option would cap all itemized deductions, the child tax credit and exclusions for employer-provided health insurance at 2 percent of a family's adjusted gross income, and also exclude interest deductions for state and local bonds.

The CRFB's proposals are a thorn in the side for Mr. Obama because the group's board includes prominent Democratic economic advisers such as Alice Rivlin, a former director of the Office of Management and Budget under President Clinton and a co-chairwoman of Mr. Obama's debt reduction task force in 2010.

Asked about the group's proposals this week, White House press secretary Jay Carney said he hadn't seen the specifics but added that such proposals generally are not "feasible."

"Rates on the top 2 percent, the wealthiest Americans, have to rise," Mr. Carney said Thursday. "There is no deal without that acknowledgment [by Republican leaders] and without a concrete, mathematically sound proposal around which both sides can come together and get this done."

Mr. Obama has said the math of simply closing tax loopholes and deductions "doesn't add up." And while CRFB's proposals would raise considerable revenue only from high earners, former Obama OMB director Peter Orszag went into more detail Thursday about why Democrats believe such an option isn't "realistic."

Mr. Orszag cited an analysis by the left-leaning Tax Policy Center of a proposal to cap itemized deductions at $50,000. According to 2009 data from the IRS, wealthier households who claimed average deductions of $50,000 took 90 percent of their deductions from three main areas: mortgage interest, state and local taxes, and charitable contributions. Capping deductions, he said, would hit charitable giving hardest because it's the "most discretionary" of the three.

"That's really where the bulk of the hit will come," Mr. Orszag said. "There's not really much you can do about your state and local taxes or your mortgage, without moving. "You'd be talking about tens of billions of dollars in reduced giving to the nonprofit and charitable sectors."

This week, Mr. Obama has tried to make the debate over the fiscal cliff homier and more personal, citing the impact of tax increases on ordinary families and the damage losing tax deductibility would do to charities.

On Thursday, he visited the Falls Church, Va., home of the Santana family, and said that "in the midst of the Christmas season ... the American people are counting on this getting solved."

At a meeting with business leaders on Tuesday, the president said it is "not possible" to raise the revenue he's seeking through closing deductions and loopholes alone. Then Mr. Obama corrected himself.

"It is possible to do, theoretically; it is not possible or wise to do as a practical matter," he said, pointing to the potential impact on charities and nonprofits.

Huseyin Yildirim, associate professor of economics at Duke University, said the affect on charities would be uneven.

"All charities will lose revenue, but I expect that educational and health organizations will be hit the hardest, while religious and social-service organizations will be affected the least, as their donor base is skewed toward lower-income households who are less likely to enjoy tax credits to begin with," he said in a statement.

But others point out that Mr. Obama's proposed budget for fiscal 2013 included a proposal to limit charitable giving deductions at 28 percent, rather than the current 35 percent, for those making $250,000 or more.

The White House said in February that 80 percent of overall contributions "wouldn't be affected at all" because the money comes from families who earn less than $250,000, an argument disputed by many charities.

"The president is sending mixed messages to the charitable community," Sue Santa, senior vice president of the Philanthropy Roundtable, said in statement at the time. "On one hand, he wants to limit the charitable deduction. On the other, he wants millionaires to continue to give to charity while also paying higher taxes."

Speaker John A. Boehner, Ohio Republican, said this week that Mr. Obama was frustrating their negotiations by moving the goal posts. He said Mr. Obama in 2011 favored the GOP's plan to bring in revenue through closing deductions and loopholes.

White House officials say the president supported the idea as part of an overall plan to update the tax code, and that Mr. Obama envisioned raising tax rates on the top 2 percent of wage earners if Congress couldn't complete the changes to tax law by the end of this year.

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