I saw it – and then it disappeared.  Early this morning, the Yahoo front page news story about a potential Fiscal Cliff compromise had it and then when I went back later, it was gone.

The piece I read around 6:30 am on Yahoo mentioned that the compromise would likely include a 28% cap on deductions and a $3.5 million estate tax exemption with a 45% top estate tax rate.  Ouch on the 28% deduction cap; o.k. on the estate tax compromise. (Note: it mysteriously disappeared and can’t be found in any web posting – maybe it was revealing too much, maybe not factually correct)

I have been predicting on this blog that a deduction cap will be slipped in any Fiscal Cliff compromise.  It’s an easy target.  Who is going to complain? Maybe your donors won’t notice that they just created a surtax of $.05 to $.10 per charitable dollar given for itemizers?  On a $1,000 charitable gift, that is about $50 to $100 more tax dollars your donor will be paying.  On $10,000, that is $500 to $1,000 more in tax.  On a charitable gift of $100,000, that is a $5,000 to $10,000 penalty.  On the $1 million dollar giver, that is a whopping $50,000 to $100,000 surcharge on their charitable giving.  We are talking a lot of money for the biggest donors.

No one can really tell what this may do to charitable giving (besides boosting 2012 Donor Advised Funding giving and gift acceleration in general).  But, it is still bad news for philanthropy.

Top 10 Reasons Why Capping Deductions is a Bad Idea

With the Fiscal Cliff possibly being averted as we speak, it is very easy to see some tampering with deductions – an easy target because they represent easy numbers.  By “easy numbers”, I mean that Congress always has to make their numbers add up – with as little political capital being used  as possible.

And, by lowering the value of deductions or capping deductions, Congress would essentially be reducing the value of charitable income tax deductions for those in higher income tax brackets (among other areas formerly favored/encouraged like mortgage interest). While it looks like easy money to politicians, there are so many reasons why this idea stinks.

Here are my top ten reasons why Congress should not tamper with deductions (particularly charitable deductions):

1. Lowering the value of charitable deductions is basically a new tax on charitable givers – if you are going to raise taxes, why not raise taxes on non-charitable givers?  At least charitable givers are putting their money to good use feeding hungry people, educating the young, saving the environment….
2. On that vain, why not at least raise taxes equally for charitable and non-charitable givers – again, why penalize those who are trying to do good with their money!
3. People who give to charity (and itemize) are supporting the public good – things that the government would have to provide if not for their charitable contributions!  Ok Congress, you might save a few dollars but by messing with charitable deductions, who knows the new costs you might incur (in jobs and service losses) if your plan really causes a drop in charitable giving.
4. The idea of offering incentives for charitable giving is to encourage and reward people to support the public good – again, stuff that the government might have to offer if nonprofits weren’t providing it.  By reducing the value of the charitable deduction, aren’t you discouraging people from giving to charity?  Sure you want to do that?
5. America is by far the most charitable nation in the world – hands down.  You want us to be like Europe?
6. Nonprofit fundraising is a $300 billion a year industry (according to Giving U.S.A.) – that is about the amount raised each year ($200 million+ from individuals).  That money is not only going to support lot’s of good causes that the government now doesn’t need to provide; that money actually supports thousands upon thousands of jobs in the nonprofit sector – many of which will be lost if your tampering significantly reduced those revenue figures.
7. Be honest – don’t raise taxes by reducing the value of formerly encouraged behavior because people won’t notice until next April or ever.  Come on, be straight with us and treat us fairly.
8. Bean-counting – the way accountants find ways to “raise” revenue by cutting expenses – is the antithesis of growth.  You don’t grow by cutting corners – you just make your numbers look good in the short term (something corporate America loves to do).  Cutting the value of  the charitable deduction is bean-counting. Yes, in the short term, your numbers might look  better.  In the long run, you might do significant damage to the nonprofit sector and cause the government to have provide more services.
9. Do you want to encourage positive behavior through the tax code or not?  Do you want encourage home ownership or not (mortgage deduction gets hit with the deduction cap, too)?  Clearly, the government has had an interest in promoting various things through tax benefits – now you are going to stealth-fully pull them out to make your numbers look good.
10. Readers – please write in your own comments!