Editor's Note: This is the latest in an ongoing series about the building blocks that lawmakers could put on the table as they search for a deal to avert the fiscal cliff.
Looking for a way to put hundreds of billions of dollars back into the federal budget? Eliminating the charitable giving deduction would do just that.
The charitable giving deduction is the piece of tax code that allows Americans who itemize their deductions to subtract donations they give to tax-exempt organizations from their taxable income. For example, if John Doe gave $100 to his church, he could document that donation and subtract it from the income on which he would be expected to pay taxes.
Wealthier Americans get the most out of the charitable tax deduction, because their rate of taxation is higher. So if John Doe's income level puts him in a 35 percent income tax bracket, he would save $35 in taxes from his $100 gift. But if John Doe only pays 15 percent income tax, that same donation would only save him $15.
And John Doe can't deduct anything over 50 percent of his total taxable income.
The deduction is seen as a way to encourage charitable giving. It was first implemented in 1917 when World War I saw the income tax at high levels and policymakers worried that wealthier Americans would not have money left over for charity after taxes, according to the Tax Policy Center.
Almost a century later, doing away with the income tax reprieve given to taxpayers who itemize their gifts to charities, nonprofits, religious organizations and educational groups is an unpopular idea, but it would account for $239 billion between 2013 and 2017, according to the White House budget.
That said, the idea of getting rid of the deduction altogether is one opposed by both the left and the right. Some seek to modify it, while others say any change would be a needless tax increase.
Michael Ettlinger, vice president for economic policy at the liberal think tank Center for American Progress, called tossing out the charitable deduction "a bad idea" that would leave America either more dependent on the government or facing austerity.
"Eliminating it would undermine activities that help low income people, that pay for the arts, that do a number of other things that are where government is much more heavily involved in other countries," Ettlinger said. "I don't think anyone's pushing hard to get rid of the charitable deduction."
Ettlinger called the fact that Americans in lower tax brackets get less back for their donations "an upside-down subsidy" and said his plan would fix that.
The proposal Ettlinger and others from CAP are putting forward to avoid sailing over the fiscal cliff includes a modification to the charitable giving deduction that would set the amount givers get back at 28 percent.
Instead of deducting the gift from taxable income, "take 28 percent of your charitable contribution and just subtract that from whatever you owe," Ettlinger explained.
Seth Giertz, the University of Nebraska economics professor who co-wrote the Congressional Budget Office's May 2011 analysis of options for the charitable giving deduction, said changing to a percent credit would cost the government less without hurting charities as much as eliminating the deduction altogether.
"It's probably going to hurt not a whole lot," Giertz told ABC News Wednesday. "But it's probably more likely to hurt certain charities that some really high income people give money to." Universities, for example, might lose out in that scenario.
Giertz said that option might encourage more giving in other areas, however, because taxpayers who chose not to itemize their deductions could still claim the nonrefundable tax credit.
Another option the CBO studied in 2011 involved adding a minimum amount to the size of the gift a taxpayer could claim.
"If we had a floor like a fixed dollar floor … that's probably not going to affect at all the giving from high income people that give a lot maybe to educational institutions," Giertz explained. "It might affect a little more moderate giving people."
But Giertz said either of these options would have to be part of a larger package of changes to achieve enough savings to bring the country back on good footing.
"Given the fiscal problems we're looking at, you can't just scale back the charitable deduction," Giertz said. "Problems are just too big for that."
And J.D. Foster of the right-leaning Heritage Foundation said taking away any deduction amounts to a tax increase that would not get at the root of the issue.
"In my view, the central fiscal problem we face is the federal government spends far too much, and will soon be spending far more as the entitlement programs balloon," Foster wrote in an email. "Until the President gets serious about this and puts forward substantive ideas on how to reign in federal spending, especially the entitlements, then there is not even a wisp of justification for talking about any tax hikes."
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