They help drug addicts in the Tenderloin, feed hungry children and aid struggling public schools. They’re also big fans of tax breaks for America’s millionaires.
Bay Area nonprofits, which often advocate for some of the neediest Americans, are finding themselves the unlikely defenders of a politically unpopular stance: keeping some tax loopholes for the rich.
“It’s a paradox,” said Jan Masaoka, CEO of the California Association of Nonprofits, a coalition of more than 1,600 charities. “The nonprofit sector, which roots for the underdog, supports tax breaks to the wealthy because charitable deductions help us.”
Tax policy has been a hot topic in this year’s presidential campaign, with both candidates floating proposals to broaden the tax base by eliminating tax breaks for the wealthiest Americans.
While Republican candidate Mitt Romney has been vague on specifics, he has said he wants to limit the wealthiest taxpayers’ deductions, which could directly affect charities’ bottom lines. In the Oct. 3 presidential debate, he proposed putting a $25,000 or $50,000 cap on all itemized deductions.
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President Barack Obama’s 2013 budget proposal pushed for capping the charitable deduction at 28 percent for taxpayers at the highest marginal income rate. Those are individuals whose annual income is greater than $200,000 and couples with income that exceeds $250,000.
Although Obama’s plan would have less effect than Romney’s, it too would shrink incentives for top earners to donate to charities.
Most voters generally favor closing tax loopholes for the upper tier of earners, but a key loophole – the itemized deduction for charitable giving – has become a major lifeline for charities. Limiting those tax incentives means it would be more expensive for many Americans to donate to charities.
That’s a big worry for the San Francisco Bay Area, home to one of the largest nonprofit sectors in the nation. By one estimate from the Stanford Project on the Evolution of Nonprofits, there are more than 9,800 nonprofits in the Bay Area alone. Those groups spent $41 billion in 2000, representing nearly 14 percent of the total regional gross domestic product, according to the study.
Officials say it’s not surprising that charities across the board support tax deductions that encourage philanthropy: People get a tax write-off, and charities get a donation.
“Clearly, the nonprofit sector supports it,” said Colin Lacon, president and CEO of the Northern California Grantmakers, a membership association for philanthropic associations. “It’s a way to encourage those who have the income to give.”
With nonprofits already scrounging for money in a climate of dwindling public funds and competitive government grants, donations – often from wealthy donors – are becoming more important to many charities.
“Public funds are getting tighter and tighter on the state and national level, so what you’re finding is that folks are expanding their search for donors and private sources,” Lacon said. “But they don’t match up. Public dollars are huge. It creates some pressure that says the philanthropic community has to fill the gap.”
Wealthy donors are hugely important to charities. Of the nearly $300 billion donated to charities last year, individuals donated more than 70 percent, according to a Bank of America study released last week. Roughly half of that was donated by the wealthiest 3 percent of American households.
There’s ongoing debate about how much of an impact closing tax loopholes would have on charitable giving, but almost everyone agrees that as tax incentives go down, so do donations.
“Some people want to give whether they get a tax break or not,” said Micheline Savarin of the United Way of the Bay Area, one of the largest area nonprofits that provides food, shelter, after-school help and work training to impoverished local communities. “I would hope (changing tax policy) wouldn’t affect the giving, but it probably would.”
Martin Feldstein, an economics professor at Harvard University, estimated that if politicians completely axed income tax deductions for charitable contributions, donations to education nonprofits and hospitals would drop 40 to 65 percent.
But major donations don’t look like they’re going to evaporate anytime soon.
More than half of households with annual income of more than $200,000 or a net worth of more than $1 million said they would maintain their level of giving even if they couldn’t take any deductions, according to last week’s Bank of America study.
Masaoka, of the California Association of Nonprofits, said presidential tax policy is important for charities because some people’s donations are spurred by tax write-offs, but nonprofits are still primarily banking on plain old generosity.
“For the most part, people give to nonprofits because they care about this or that art museum or cause, not because they want a tax deduction,” she said.