	Introduction

The Administration's 2010 and 2011 budget outlines contain a proposal to cap the value of itemized deductions at 28%, for high-income taxpayers. In the 2010 plan, the expected revenue was dedicated to addressing health care issues. Other revenue sources have been proposed for this purpose and the current proposal is part of the Administrations tax provisions for upper income taxpayers. The itemized deduction cap has generated considerable concern about its potential negative effect on charitable contributions, especially in light of the difficulties charities are having during current economic conditions. The proposed tax change, however, would not go into effect until 2011 and could actually increase current contributions in the short term. Thus, it is the longer-term, or permanent, effect on giving that is considered in this analysis. The analysis also considers the effects of other income tax changes and of the estate tax. The following section provides calculations of the consequences for charitable giving, which are estimated based on the share of giving that is affected by the cap, the magnitude of the price change, and the elasticity (behavioral response to tax changes). Two effects are considered for the cap: the effect of imposing a cap on the current (2009) top tax rate of 35% and the effect of imposing a cap on the top rate of 39.6% which is scheduled for 2011. Effects are calculated compared to two baselines: current tax rules with tax rates of 33% and 35% and tax rules in 2011 with rates of 36% and 39.6%. Currently, taxpayers are allowed to deduct the entire cost of appreciated property, without paying the capital gains tax. There are income effects associated with the charitable giving deduction cap itself, which are small since on average charitable contributions are a small part of a taxpayer's budget, typically less than 3%. Compared with 2011 law, charitable giving should rise by about a 1% due to the proposals. Effects by Types of Charitable Objectives

Different types of charities may be affected differently by the change because the negative effects are more concentrated on higher-income donors. If higher-income individuals contributed the same shares as overall contributions, the estimated effects in Table 4 would apply to all charities. These include religious organizations, combined purpose charities and charities designed to meet basic needs. Organizations that are more likely to be recipients of donations from high-income individuals will be more likely to have reductions in gifts and those reductions will be larger. Health will experience the greatest declines, followed by arts, other, and education. As in the case of the income tax discussion, this section examines historical changes in the estate tax, the estimated effect of different regimes on charitable giving through bequests, the effects of temporary changes, and the effects of the estate tax on gifts during the lifetime. Although changes in either the estate tax rate or the estate tax exemption are expected to elicit behavioral responses, estimates in this study are confined to the effect of changes in the estate tax rate in this study. Compared to the President's Budget Outline, the low elasticity estimate suggests a reduction of nearly 4% in total charitable contributions from a repeal of the estate tax, an increase of almost 1% from reverting to 2001 estate tax law and a decrease of nearly 1% from adopting the provision in the Senate Budget Resolution. One approach if the concern about the itemized deduction cap is primarily directed at charitable contributions is to exclude charitable deductions from the cap. The retention of the current estate tax rates compared with the elimination of the tax now scheduled for 2010 would increase charitable giving, but would lower it compared with the pre-2001 rates scheduled to be in effect if the Bush tax cuts expired.
The Administration's 2010 and 2011 budget outlines contain a proposal to cap the value of itemized deductions at 28%, for high-income taxpayers. In the 2010 proposal, the expected revenue was dedicated to addressing health care issues; as other sources are expected to finance health care, the proposal is now part of the increased taxes on upper income taxpayers. This proposal has generated considerable concern about its potential negative effect on charitable contributions. This concern has been heightened because charities are having difficulties in the current economic climate. The proposed tax change, however, would not go into effect until 2011 and thus the change could actually increase near-term contributions. Thus, it is the longer-term, or permanent, effect on giving that is the effect considered in this analysis. The analysis also considers the effects of other income tax changes and of the estate tax.
The estimated effects of the cap and other elements of the budget package depend on whether the proposals are compared with the current tax rates of 33% and 35% or the rates scheduled for 2011, 36% and 39.6%. Compared with current rules, estimated effects are between one-half a percent and 1% decline in charitable giving, depending on whether the effects of capital gains tax rates on gifts of appreciated property are included. When compared with tax rate provisions in 2011, charitable deductions are estimated to fall by about 1.5% if only the cap is considered, but if income effects from the entire budget package are included contributions actually rise 2.5%. The relatively modest effects of the proposal arise because (1) the effect of caps on the subsidy value is limited, (2) only a fraction (about 16%) of charitable giving is affected, and (3) because evidence suggests that behavioral responses to changes in subsidies are relatively small.
Different charities will be affected differently because the giving patterns of higher-income individuals differ from the average. Estimates show smaller reductions or larger increases for religious or combined charities, or charities directed at meeting basic needs, whereas the proposal is more likely to have negative effects for charities serving the health sector, and to a lesser extent art and education charities. Overall, contributions that benefit the poor will be less likely to fall or more likely to rise than the average contribution because the charitable purposes more favored by higher-income contributors are less likely to direct benefits to low-income recipients.
Estate tax changes would also affect charitable giving. The budget outlines hold the current 2009 estate tax rules constant. Allowing the estate tax to lapse in 2010, as would the current rules, could lead to reductions in charitable giving of around 4%. Returning to the higher estate tax rates currently scheduled for 2011 could increase charitable giving, by about 1%, while adopting the FY2010 Senate Budget Resolution provision could reduce charitable contributions by about 1%. Although a smaller share of charitable contributions are affected by the estate tax, the changes in subsidy value are much larger if the estate tax is repealed, and the estimated behavioral response is greater. The immediate effects on contributions and the distributional effects of changes are, however, uncertain. Over half of bequests involve gifts to foundations, which finance a variety of charitable objectives and provide benefits with a considerable delay.
Revenue from the cap on itemized deductions is currently directed at increasing revenues to finance other programs. If the cap is rejected either overall, or for charitable contributions, other revenue sources found, or the debt increased. Alternative revenue options include, among others, implementing a floor under charitable deductions and increases in tax rates on high-income taxpayers.