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Obama’s attack on the charitable deduction

Lawmakers got heated Tuesday over the future of the charitable deduction at a Senate Finance Committee hearing Tuesday, according to the Chronicle of Philanthropy.

“There has been a charitable deduction in the tax code for nearly a century, and the proposals on the table would undo it,” Sen. Orrin Hatch said during the hearing. “This is not the area for experimentation by the federal government.”

The charitable deduction’s been under fire yet again the past month, once President Obama proposed reducing the deduction, for those with income over $200,000, from 35 percent to 28 percent as part of his now rejected American Jobs Act. In 2009, Obama included a similar measure in his 2010 budget plan as a way of reducing the budget deficit. The proposal in the recent jobs bill was estimated to be worth an additional $400 billion in tax revenue over the next 10 years.

One of the potential losers if the administration’s ultimately successful in reducing the deduction? Colleges and universities.

“Over the years that I’ve been working on government relations, the charitable deduction has always been very important to Stanford,” said Larry Horton, senior associate vice president for Government & Community Relations at Stanford.

Horton said that Stanford maintains a strong belief in the importance of the private sector’s role in education.

“What is also very important to us is that America has a private sector which does charitable activities and publicly useful things that actually competes with the best of what the public sector does,” he said. “We are probably the only country in the world in which private universities can compete with public universities.”

Some at the school, however, say the impact of the charitable deduction is less critical.

“[Most] donors give for many other reasons than the tax benefits, so we would not anticipate a dramatic change in giving levels even if the jobs bill (had passed) in its current form,” said Rebecca Smith Vogel, assistant vice president in the Stanford Office of Development.

Matt Owens, vice president for federal relations Association of American Universities (AAU), disagrees.

“Study after study indicates that the charitable deduction is an important incentive for donors,” he said.

One such study, entitled “How Does Charitable Giving Respond to Incentives and Income?”, found that the price elasticity of charitable giving was greater than one. In other words, an increase in the price of giving of 1 percent would result in a decrease in charitable giving of greater than 1 percent. The report, published in the National Tax Journal, concluded that a change in the charitable deduction could have such an effect.

Brian Flahaven, the director of government relations at the Council for Advancement and Support of Education, agreed that the impact would be significant.

“The fact that you’re increasing the cost of giving – which is what the president’s proposal would do – nobody disputes the fact that it will lead to less giving,” he said.

Flahaven also cited another survey, which asked the cohort which would be affected by the policy change if they would stop giving if the charitable deduction did not exist. While the answer was mostly no, according to Flahaven, “70 percent say that they’d somewhat or dramatically decrease their giving level.”

Officials at Stanford and other educational institutions agreed that if the policy came under serious consideration on Capitol Hill, the reaction from Stanford and peer universities would be substantial.

Lynne Munson, the former deputy chairman of the National Endowment for the Humanities, pointed to the strength of university lobbying efforts.

“[Universities] will go ‘all in’ to prevent this proposal from becoming law,” she said. “Our colleges and universities boast one of the most massive, well-financed, and well-coordinated lobbying operations in the country–easily rivaling the corporate lobby.”

Larry Horton of Stanford’s government relations office pointed to Stanford’s efforts against the Tax Reform Act of 1986 as an example of how it would handle a potential decrease in the charitable deduction. Horton himself was involved in the lobbying effort by Stanford against the legislation, which, among other changes, sought to decrease the charitable deduction. In an interview in August of 1986 with the Los Angeles Times, Horton said: “I believe that [universities] are one of the single biggest losers in this tax bill.”

At that time, the lobbying effort put forward by Stanford and peer private universities was quite significant and continued even once the legislation was passed. Today, Horton explained that Stanford lobbied – alongside a “coalition of private colleges and universities” – to overturn components of the tax bill and eventually succeeded in doing so in 1996.

In addition to such lobbying efforts, Stanford would also be expected to decrease its expenditures if donations did indeed decrease after a policy change.

“Charitable gifts [contribute] to universities’ ability to hold down tuition increases, increase financial aid, educate students, increase financial aid, and conduct cutting-edge research,” said Matt Owens of AAU.

Concern at Stanford also extends beyond the boundaries of the Farm itself.  Howie Pearson, a senior philanthropic advisor at Stanford, noted the importance of the charitable deduction to the culture of charity.

“Note that in the long run, the promotion of charitable giving through the tax laws supports a healthy societal attitude of philanthropy,” he said. “If the social policy is viewed as less supportive of charitable giving, over the long run one might expect the strong philanthropic bent of Americans to give to weaken to some extent.”

Alex Katz is a staff writer for the Stanford Review. He is a contributor to The College Fix.

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