Washington News

On March 1, a sequestration of approximately $85 billion in federal spending will be initiated. The majority of the reduced spending will affect the Department of Defense, but the IRS and many other governmental agencies will also face reductions. In an effort to avoid this budget sequestration, on February 14 Senate Democrats published their proposed replacement plan.

The American Family Economic Protection Act is a plan that proposes one-half of the $85 billion to be covered by tax increases and one-half to be covered by budget cuts. The plan would reduce defense spending by $27.5 billion and other domestic discretionary spending by the same amount.

There are four major tax increases in the proposed plan. Not surprisingly, the two parties have differences in the estimated revenue gained from each tax increase. Sen. John Barrasso (R-WY) is the Chairman of the Senate Republican Policy Committee and has provided his specific anticipated revenue numbers for these tax increases.

1. Buffett Rule – Upper income individuals will have a 30% minimum tax after deducting their charitable giving. This rule is named after Warren Buffett, who supported this tax increase in a Senate hearing. The 30% minimum tax is phased in between $1 million and $2 million of taxable income. Sen. Barrasso projects $5 billion in new revenue the first year.

2. Energy Taxes – There are six provisions that reduce various deductions and tax benefits for energy companies. The estimated revenue in the first year is $4.75 billion.

3. Carried Interest – The general partners' share of "investment services partnership interest" is currently taxed as capital gain at a maximum rate of 23.8%. The bill proposes taxing this at the maximum federal rate of 39.6%. This provision may raise $1.3 billion the first year.

4. Corporate Jets – The depreciation schedule for most corporate jets will be changed from five years to seven years. This is expected to raise $0.05 billion.

The White House supported the bill and stated, "Senate Democrats offered a balanced plan to avoid across the board budget cuts that will hurt kids, seniors, and our men and women in uniform. The plan includes spending cuts that won't harm middle-class families while closing tax loopholes that benefit the wealthiest."

Senate Minority Leader Mitch McConnell (R-KY) indicated that the plan with tax increases will not pass. He stated, "Their whole goal here isn't to solve the problem; it's to have a show vote that's designed to fail, call it a day, and wait for someone else to pick up the pieces."

House Hearing on the Charitable Deduction

In preparation for potential major tax reform in 2013, the House Ways and Means Committee held a hearing on charitable deductions on February 14. In a change from the normal process, Chairman Dave Camp (R-MI) permitted 43 representatives of all sectors of philanthropy to offer their recommendations.

Chairman Camp indicated that he had "granted all timely requests to testify in person" so that members of the charitable community could educate Congress on the various potential changes that are being considered.

Chairman Camp stated, "Our nation's public charities and private foundations perform invaluable services for our societies – at home, nationally, and in some cases, across the globe. This is especially true during times of economic slowdown and high unemployment – challenges we have struggled with mightily over the past years."

Chairman Camp and the committee are considering four potential changes.

1. Limit Tax Rate Benefits – Under White House proposals, the benefit of charitable deductions could be limited to 28% even though the tax bracket is up to 39.6%.

2. Dollar Cap – The charitable deduction could be limited to a fixed cap such as $50,000.

3. Charitable Floor – A floor such as 1.8% of adjusted gross income would apply to itemized deductions. Only charitable gifts in excess of this amount would be deductible.

4. Tax Credit – The system of charitable deductions could be replaced with a tax credit for charitable gifts.

Ranking Member Sander Levin (D-MI) noted that the charitable deduction is one of the "10 largest tax expenditures" and individuals claimed deductions in 2010 of over $170 billion. He also acknowledged the potential for additional limits on deductions to impact taxpayers.

Levin stated, "As we know, there are already deduction limitations in place for the very wealthiest Americans – through the so-called Pease provision that was reinstated during the action that Congress took on New Year's Day to avoid the fiscal cliff. I would be interested in knowing from our witnesses today how further limitation would affect their organizations."

Editor's Note: With the current budget discussions, it is quite uncertain whether there will be major tax reform in 2013. However, because nearly all proposals for major tax reform involve reducing the tax rates by dramatically limiting itemized deductions, it is essential for charitable organizations to continue to have their voice heard. The 43 philanthropy speakers at this hearing strongly affirmed the need for appropriate incentives for charitable giving.