Many charities are wringing their hands over industry-specific tax changes and proposed tax changes that will negatively impact giving. The tax-increase tsunami that will swamp taxpayers later this year ought to be of greater concern. In an economy where individual generosity is in great need, individuals will simply have less to give.
Proposed and looming tax changes that adversely impact charitable giving include president Obama’s proposal to reduce the charitable deduction. At least one state, New York, is also taking steps to penalize the generosity of high income earners.
Also, tax-free charitable distributions from IRAs will no longer be allowed starting next year. And it is not clear how the return of the death tax at year’s end (55 percent top death rate tax on estates over $1 million) will influence charitable contributions.
All of these tax changes will have a direct and adverse impact on charitable giving. But of even greater significance is the overall tax burden on individual taxpaying Americans, which will dramatically increase at the end of the year.
According to Americans for Tax Reform, in six months the largest tax hike in history will take effect. One of the most dramatic increases for average Americans will be the expiration of tax cuts enacted in 2001 and 2003. Beginning in January, the lowest rate will jump from 10 to 15 percent. The highest will shoot up from 35 to 39.6 percent.
On top of that, the marriage penalty will now be imposed on the very first dollar of income, and the standard deduction will no longer be doubled for married couples. The child tax credit will be chopped in half. The capital gains tax will rise from 15 to 20 percent. The dividends tax will more than double, from 15 percent this year to 39.6 percent in 2011. And the Alternative Minimum Tax will snare over 28 million families this year (it snagged 4 million last year). All of this is to say nothing of the twenty new or higher taxes that come as a result of president Obama’s new healthcare plan.
Of course, taxpayers are also in for higher state and local taxes. In my state of Washington, for example, legislators imposed nearly $2.5 billion in new taxes over the next three years and increased total state spending by $3.2 billion. An initiative to add an income tax (Washington State does not currently have an income tax) on high-income earners recently qualified for the November ballot.
According to Giving USA2010, overall giving declined for the second year in a row in 2009. Last year, “philanthropy has seen the deepest decline ever recorded by the Giving USA Foundation, which has tracked annual giving since 1956.” As a greater portion of individual Americans’ income goes to taxes, they will have a smaller amount to give to charity.
That may benefit those nonprofits that have essentially become branches of the government and depend on it for the bulk of their annual income (though supporting the charitable sector through compulsory taxation is hardly charity). But for those charities that count themselves a part of America’s truly independent sector, the greater tax burden on individual Americans ought to be cause for concern.