Repealing the federal estate tax could end up choking off billions of dollars in contributions to charities whose resources have been stretched thin by the Hurricane Katrina relief effort, a top tax policy researcher warned Congress.Testifying on behalf of the Brookings Institution's Tax Policy Center, economist William Gale cited a variety of studies suggesting that "estate tax repeal would reduce charitable bequests by between 22 and 37 percent" - a drop that would drain between $3.6 billion and $6 billion each year from the nation's charities.
If anything, the full impact on the budgets of nonprofits could be even greater, because estate tax repeal would also discourage the wealthy from making charitable donations during life, he said during hearings before the Senate Finance Subcommittee on Social Security and Family Policy.
"To put this in perspective," Gale said, "a reduction in annual charitable donations in life and at death of $10 billion due to estate tax repeal represents a 5 percent decline in overall charitable giving" - enough to offset "the total grants currently made by the largest 110 foundations in the United States."
Although he conceded that raising the estate tax exemption level would have only a minor effect on charitable giving, the Brookings economist maintained that repeal of estate taxes for the wealthiest of Americans "would have a significantly negative effect" on the nation's charities.
"Repeal would convey an explicit message that charitable giving at death is no longer encouraged," he told Congress.
The subcommittee also heard testimony from representatives from several major charities involved in the Hurricane Katrina relief effort, who appealed for sweeter tax incentives to encourage charitable giving.
Robert Reccord, president of the Southern Baptist Convention's North American Mission Board, told Congress that "any effort by the federal government that encourages people to give" would provide essential resources to "organizations that are on the front lines of need."
Reccord expressed particular support for proposals to allow charitable deductions by taxpayers who don't itemize - a change he called "a wise policy choice" that would foster "a giving impulse among younger taxpayers," as well as "lower-and middle-income taxpayers whose incomes do not allow them to itemize."
Noting that two thirds of Americans currently claim the standard deduction, he said that allowing non-itemizers to deduct charitable contributions encourages 83 million more Americans to support charity.
The plan to create a charitable tax deduction for non-itemizers is one of several key provisions in the CARE Act being pushed on Capitol Hill by the subcommittee's chairman, Sen. Rick Santorum, R-Pa.
That bill would also create incentives for individuals to give tax-free contributions to charities from individual retirement accounts, encourage food donations by farmers, restaurants and other businesses, and promote increased charitable giving by corporations.
Salvation Army Major George Hood told the subcommittee that his organization is particularly interested in loosening the current restrictions on IRA contributions to charities.
Although "we are fortunate that some of our donors are willing to share the fruits of their life's labor with us," he said it is frustrating "to see potential gifts sharply reduced by the requirement that the IRA be vacated and a tax penalty applied to the proceeds."
"Penalizing a charitable gift is simply inconsistent with our long-established tradition of encouraging voluntary, private donations to worthy causes," Hood told Congress.
Luke Hingson, president of the Pittsburgh-based Brother's Brother Foundation, voiced support for a separate CARE Act provision creating a tax deduction for individual volunteers who provide transportation and other services to a charity.
"In the case of BBF, it would increase the individual's interest in delivering donated goods to our facility, reduce our cost and increase our potential to provide useful donated items to those in need," he said.
Noting that charities such as his are being asked to do more because of the disaster in the Gulf Coast, Hingson told Congress that if the provisions of the "CARE Act had already been enacted into law, BBF would have had a greater ability to provide relief to evacuees seeking refuge from Hurricane Katrina."
Representatives from the charities cautioned against imposing new reporting and recordkeeping requirements on nonprofits to curb abusive practices. While "charities should operate within the letter and spirit of the law ... we oppose linking 'charitable reforms' to the CARE Act," Reccord told the subcommittee.
Many of the "new reporting requirements proposed as 'charitable reforms' would divert dollars from helping people to complying with federal regulations," he said. "It is not wise public policy to burden our caring sector with expensive new requirements at a time when fuel costs are soaring and a major disaster has struck our nation."
BBF's Hingson agreed that new regulations could have a disruptive effect on relief efforts. "This is not the time to undermine a charity's ability to function in the name of reform," he told Congress.
