What Might be the Impact of a Cap on the Deduction for Charitable Contributions?

In his most recent budget proposal, President Obama is seeking to impose a cap on itemized deductions in the personal income tax return – which includes the deduction for charitable contributions. This provision, part of the administration’s strategy to raise revenue to pay for government spending, has been a part of every White House budget proposal since 2009, and every year arts advocacy organizations join the rest of the nonprofit sector in opposing the changes.

So far, the cap has been successfully warded off, but there’s growing concern that if Republicans and Democrats ever agree on sweeping tax reforms, the charitable deduction will be on the chopping block. The fear that limiting the tax deduction will lead to reduced donations to charitable organizations is particularly great this year due to the tax increases that were passed at the end of 2012, prompting the Charitable Giving Coalition to step up its resistance with a new website: protectgiving.org.

While it’s become a popular strategy on Capitol Hill to complain about the lack of progress while refusing to budge from one’s own policy positions, a case can be made that the nonprofit sector’s lobbying on behalf of the charitable deduction has neither improved the financial stability of the sector nor created greater legislative security. At best, it has limited the declines in individual giving in recent years. So rather than simply digging our heels as we head into the next round of budget debates, let’s take a moment to explore a broader range of policy options and see which might make the most sense for the arts.

Before we get to that, though, here’s a refresher on the mechanics of the charitable tax deduction for anyone who needs it.