The Honorable F. James Sensenbrenner
United States House of Representatives
2449 Rayburn House Office Building
Washington, DC 20515
Dear Congressman Sensenbrenner:
On behalf of the members of National Taxpayers Union (NTU), it is my honor to endorse H.R. 3407, a bill to exempt charitable contributions from the limit on itemized deductions for federal income tax purposes. NTU’s members are grateful for the initiative and wisdom you and your colleagues have shown by introducing this legislation.
The 2001 and 2003 taxpayer relief laws contained many welcome provisions, including across-the-board rate reductions, additional protections from the marriage penalty, and more moderate tax burdens on dividends. One key feature of these laws, which delivered not only tax relief but also simplification, was a gradual wind-down of the Personal Exemption Phaseout (PEP) and the Pease limitation on itemized deductions originally implemented under the ill-advised Omnibus Budget Reconciliation Act of 1990. Barely two years after these policies had been buried, Congress decided to unearth them in 2013 through the so-called “American Taxpayer Relief Act” (a measure NTU opposed in part due to the return of PEP and Pease).
Aptly described by Tax Policy Center Director (and Syracuse University Professor) Len Burman as “really just a sneaky way to raise marginal tax rates,” the Pease limitation can also add complexity to a taxpayer’s return (such as the 10-line worksheet for calculating its effect when the scheme was in full force eight years ago). And while a Congressional Research Service report from February 2013 casually asserted that “the burden of this complexity would be eased by the use of paid tax preparers and the use of tax preparation software,” this is of little comfort to taxpayers. According to NTU Foundation’s 2015 annual study of tax complexity, the value of time and out-of-pocket costs (among them software) that Americans incurred to comply with the Treasury’s paperwork burdens (largely due to federal personal and corporate income taxes) exceeded $233 billion.
Based on these troubling aspects, NTU supports entirely eliminating PEP and Pease. Congress should only consider curtailing deductions and exemptions in an environment of comprehensive tax reform that reduces rates and complexity for everyone; anything else is simply a back-door revenue-raising exercise. Unfortunately, the “exercise” with PEP and Pease may not be concluded. Now that the infrastructure for these tax claw-backs has been established, it is much easier for Congress to simply adjust the income floor where PEP and Pease first apply, thereby ensnaring unsuspecting taxpayers who may not know of their fate until the following year’s filing season. Your legislation would initiate a more thoughtful approach to tax law by focusing on one element of itemized deductions currently falling under Pease: charitable contributions.
H.R. 3407 cannot be implemented soon enough. Many members of the economics profession have voiced concerns that federal policy on charitable contributions could be moving in the wrong direction as Congress takes up tax reform. In 2013, a total of 229 economists led by a Nobel Laureate and a former Congressional Budget Office Director urged lawmakers to “preserve the charitable deduction as a proper, beneficial, and socially cost-effective feature of the federal individual income tax and contributor to a civil society.” The signatories noted the unique nature of charitable contributions among all other federal deductions, in that a taxpayer claiming it has received no other kind of financial advantage from the transaction prior to making the donation. As they perceptively wrote, a charitable contribution “benefits neither the taxpayer nor the receiving institution, but rather the population that institution serves … .”
Indeed, the economists’ perspective might merit an even more straightforward solution: an income exclusion or credit instead of a deduction. As Public Interest Institute (PII) President Donald P. Racheter cogently concluded in a May 2013 PII Brief:
Given how many are in need year in and year out, and how many more are in need since the economic downturn in our economy and the slow recovery, let’s make it easy for people to get credit for doing the right thing, to help others instead of themselves. Let’s replace the current deduction for charitable giving, which is only of use to those few who itemize, and allow everyone to take any contributions “off the top” before determining their net income for tax purposes.
Until Congress can consider such a policy in the context of systemic tax reform, your legislation would make admirable progress toward recognizing the role of charitable giving in enabling non-governmental responses to society’s needs. Equally important, it would help to highlight the mistake Congress made in re-imposing PEP and Pease merely for the purpose of increasing Washington’s share of the private-sector economy. For these reasons, our members look forward to working with you in passing H.R. 3407 during this session.