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Proposals To Limit Charitable Deductions Leave Colleges On Edge

Danny Lee |
December 7, 2012 | 3:30 p.m. PST

Senior Staff Reporter

Lawmakers in Washington have discussed reigning in charitable deductions to calm the nation's fiscal cliff concerns. (Creative Commons)
Lawmakers in Washington have discussed reigning in charitable deductions to calm the nation's fiscal cliff concerns. (Creative Commons)
Talk in Washington of capping charitable deductions has caught the attention of nonprofits as lawmakers weigh options to generate additional revenue from the wealthy in hopes of reaching a deal to avoid going over the "fiscal cliff."

Automatic tax increases and spending cuts could kick in during January unless the White House and Republicans can reach an agreement by Jan. 1. While President Barack Obama continues to push tax rate hikes on the rich, House Speaker John Boehner and other GOP lawmakers in Congress would rather cap deductions for items such as charitable contributions in place of raising taxes. 

SEE ALSO: Fiscal Cliff Negotiations Show No Progress, Boehner Says

Obama has proposed lowering the charitable cap down to 28 percent from 35 percent for the amount taxpayers earning more than $250,000 can write off from their gifts. Any push to target charitable deductions could impact California's state-funded universities, which have sought out more private donations due to budget cuts.

Emeritus chemical engineering professor Duncan Mellichamp and his wife Suzanne donated $2 million to the University of California at Santa Barbara to establish four professorships. The Mellichamps' total donation of $6 million since 2003 is the largest sum ever given by a faculty member at that campus.

Although Mellichamp mentioned that deductibility is an important motivator behind many donations to nonprofits, he suggested that UCSB would overcome whatever deduction cap results from debates in D.C. because of the school's strengthening ties with its alumni base.

“There are several reasons why Americans are the most philanthropic people in the world. Clearly, the tax deduction is a key one,” Mellichamp said. “But a university has an intrinsic appeal, at least to its own alumni, that will mitigate this effect somewhat. Many of our students have a great experience in their background and wish to pay back the benefits they received years earlier.”

UCSB’s campaign to raise $1 billion in private donations had its strongest year ever in 2011-12 after raking in $112 million. The campus is currently three-quarters of the way toward reaching its stated goal and has solicited donations from 60,000 new donors since the campaign was launched in 2000.

However, Mellichamp added that the long-term effects of reduced donations could hurt state universities, which have raised fees in recent years due to less money coming from Sacramento.

Charitable deductions cost about $52 billion in tax revenue per year, roughly half the cost of the mortgage-interest deduction. In addition to education, religious and social service organizations are among other nonprofits that could take a hit from a drop-off in charitable contributions.

“America’s economic recovery requires a strong philanthropic sector, whose role as an investor in innovation and supporter of safety net services is more important than ever for a faster, sustainable economic recovery,” the Charitable Giving Coalition wrote in a letter pressing Obama and congressional leaders to keep the deduction intact.

SEE ALSO: Obama Proposes Higher Taxes For Wealthy

More than 90 percent of household donations for education come from those earning $200,000 or more, according to Indiana University’s Center on Philanthropy. In comparison, religious institutions drew only one-third of their support from those highest earners.

“I hope the government, which clearly needs to take drastic action to put this country back on a more sustainable basis, will not kill this goose that annually lays the golden egg, particularly to education, to social support groups, to the arts and cultural organizations,” Mellichamp said.

The Indiana University survey revealed that 50 percent of wealthy households would maintain their giving if the charitable deduction were scrapped, while 40 percent said it would decline and another 10 percent said it would drop substantially.

A study by Campbell Rinker/Dunham+Company showed that 42 percent of donors say they plan to lower their giving this holiday season compared to last year. About 32 percent said the looming fiscal cliff played a major role in their decision. Mellichamp urged lawmakers to finally come to an agreement on this issue.

“I have been tremendously disappointed with the few who benefit most from living in this country and can easily afford to pay a larger portion of their resources to support it,” Mellichamp said. “There just is no excuse for people who have the major share insisting on having it all."


Read more Neon Tommy coverage of the fiscal cliff here.

Reach Senior Staff Reporter Danny Lee here; follow him here.



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