Independent Sector is encouraged by a number of provisions in the president’s FY 2013 budget proposal that would have positive ramifications for the nonprofit sector and the communities we serve. In spending proposals, we are particularly pleased to see that the administration continues to support the Corporation for National and Community Service, and that many critical programs that serve the most vulnerable in our society have been funded.
We are pleased that the administration has recognized the importance of the charitable deduction by making clear that, under the Buffett Rule, millionaires would not be disadvantaged in their charitable giving. We look forward to working with the administration as they develop the details of this rule to ensure that the provision encourages the greatest possible giving.
We also applaud the administration’s support for an estate tax at 2009 levels, as well as the reinstatement of tax-extenders that incentivize charitable giving, including the IRA charitable rollover, which we believe should be made permanent.
We continue to be troubled that the administration has, once again, included the charitable deduction among the deductions it proposes to cap at 28 percent for individuals earning more than $200,000 and families with incomes over $250,000. Unlike other deductions, the charitable deduction benefits the communities that charities serve and not the wealthy donor. The proposed cap would have a significant negative effect on charitable giving. Since high-income donors contribute 36 percent of the money given by individuals to charities, and 85 percent of high-wealth individuals give to organizations that address basic needs, this provision will hurt the ability of public charities to serve our communities.
Independent Sector continues to evaluate the president’s FY 2013 budget proposal in light of our Guiding Principles for Deficit Reduction and Tax Reform. Further updates and analyses are available on the IS website, including updated summaries of key budget provisions.
Below is a brief summary and assessment of key provisions of particular interest to the nonprofit and philanthropic community.
The budget proposes raising over $1.5 trillion in new revenue over the next ten years. The largest portion of new revenue would be raised by allowing the 2001 and 2003 tax cuts for individuals earning over $200,000 ($250,000 for families) to expire and returning the top two income tax rates to 36 percent and 39.6 percent to raise $848 billion over 10 years. Tax rates would remain unchanged for taxpayers earning under those thresholds.
Tax provisions of particular interest to the nonprofit and philanthropic community include the following:
· 28 Percent Cap on Itemized Deductions – For the fourth consecutive year, the president proposes capping itemized deductions, including the charitable deduction, for individuals earning over $200,000 a year ($250,000 for families). Combined with a similar reduction in the value of other tax preferences for higher-income earners, including tax deferrals for income contributed to retirement plans, the proposal is estimated to raise $584 billion over 10 years. Independent Sector opposes this provision because it reduces the incentive for charitable giving.
· Buffett Rule – As a principle for broader tax reform, the budget calls for the elimination of the Alternative Minimum Tax and the establishment of the so-called “Buffett rule,” which would impose a minimum 30 percent effective tax rate for taxpayers with income over $1 million. While the Administration notes that the Buffett rule should be implemented in a way that is equitable, “including not disadvantaging individuals who make large charitable contributions,” it is unclear at this point how exactly it would interact with the charitable deduction, as no revenue estimate is provided in the budget. Independent Sector appreciates that the provision, as described, recognizes the critical difference between the tax deduction for charitable giving which incentivizes taxpayers to help others through nonprofit organizations, and other tax deductions and exclusions that subsidize spending which personally benefits the taxpayer.
· Estate Tax – The president proposes reinstating the estate tax at 2009 levels ($3.5 million exemption; 35 percent rate) once the current levels ($5 million exemption; 35 percent rate) expire at the end of this year, to raise $118 billion over 10 years. Independent Sector supports this provision, as it increases the incentive to make charitable gifts through estate planning.
· Charitable Extenders – The budget proposes the reinstatement of the IRA charitable rollover, as well as incentives for the donation of real property for conservation purposes, book inventory, computer inventory, and food. Independent Sector supports the continuation of these tax incentives for charitable giving, and believes that they should be made permanent in order to facilitate long-term financial planning and maximize the incentive effect.
· "Pease" Limit on Charitable Deductions – The budget assumes the reinstatement of the limit on itemized deductions (known as Pease after the congressman who created it) that reduces itemized deductions by 3 percent of the amount by which adjusted gross income exceeds a specified threshold, up to a maximum reduction of 80 percent of itemized deductions. The provision, first instituted in the tax code in 1990, was phased-out over 10 years beginning in 2001 and was fully repealed in 2010. With no changes to current law, the Pease provision would return with the expiration of the Bush tax cuts in 2013. In 2012, the provision would have affected single taxpayers with adjusted gross incomes of $173,650 or higher; married joint filers with incomes of $260,500 or more. The proposal would raise $123 billion over 10 years. This proposal would reduce incentives for charitable giving, and Independent Sector supports a carve-out for charitable contributions.
· Private Foundation Excise Tax – The budget proposes a single, 1.35% rate to replace the current two-tiered structure for the private foundation excise tax. Independent Sector supports a single rate private foundation excise tax.
· 10 Percent Tax Credit for Adding Jobs and Increasing Wages – The budget proposes a temporary tax credit that gives qualifying employers that add jobs and increase wages a tax credit equal to 10 percent of wages up to $500,000. Independent Sector supports making hiring incentives equally available to nonprofit and for-profit employers. In previous administration proposals, these incentives have been made available to nonprofit employers at reduced rates, and by characterizing the hiring incentives for nonprofits as “similar” to for-profits, it appears this proposal may continue to treat nonprofits inequitably.
Total discretionary spending is set at roughly $1.2 trillion for FY 2013, and while the budget adheres to the budgetary caps and limitations set in August by the Budget Control Act, it proposes increased funding for several education and infrastructure related initiatives, as well as roughly $350 million in short-term stimulus.
Spending provisions focused on meeting the needs of vulnerable populations and people with low-incomes, as well as other programs that support the work of the nonprofit community include the following:
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