By Kim Dixon
WASHINGTON (Reuters) - Charitable groups pleaded with lawmakers on Thursday not to alter the federal tax break for donations, while some Democrats said the popular deduction was in no danger and called the Republican-convened hearing a red herring.
Officials from hospitals and dozens of other non-profit groups packed a House of Representatives' Ways and Means Committee session examining the write-off used by more than 30 million Americans at a cost to taxpayers of $38 billion a year.
A repeal of the charitable donations deduction is not imminent, but plans to cap tax breaks generally for the affluent are backed by President Barack Obama. Some Republicans, too, have expressed support for such an idea.
"Please don't be fooled into thinking that limiting the charitable deduction will only impact wealthy taxpayers," said Brian Gallagher, president of the non-profit group, United Way Worldwide, who spoke on the first of six panels testifying before the committee.
Limiting the break "would have a far greater impact on charitable giving than many estimates and significantly affect our sector's ability to deliver social services," said Gallagher, who has spent more than 30 years studying why donors give.
According to an analysis by the Tax Policy Center presented at the hearing, under one proposal to cap deductions, giving to charities could fall by between 2.5 percent and 4.8 percent.
Dave Camp, chairman of the House panel, fought off criticism from Democrats who said that by calling the hearing he caused an unnecessary stir in the non-profit community.
"Our nation's public charities and private foundations perform invaluable services for our society," he said.
The Ohio Republican aims to propose legislation to revamp the tax code this year. Senate Finance Committee Chairman Max Baucus, a Montana Democrat, is working on his own plan.
Some Democrats have recently called for limiting tax "loopholes" and other tax breaks for the wealthy. They have not targeted the donations deduction, but a White House deductions cap proposal may reappear in Obama's forthcoming budget plan.
"The charitable deduction is not a loophole," said Sandy Levin, the top Ways and Means Democrat. But he said that any limitation should not be considered a "transfer to the government," as one of the witnesses suggested.
The wealthy do get more out of the donations deduction than others. Congress' Joint Committee on Taxation said 20 percent of the tax break's benefits go to those earning less than $100,000 a year, while those with incomes above $200,000 get 55 percent.
Levin questioned the timing of the hearing, when an $85 billion cut to federal spending is set to take place on March 1 and the parties are still far apart on preventing these cuts.
"We are holding this hearing on an important, but not very immediate topic," he said.
Gifts to charity are tax deductible in the United States, along with mortgage interest and other expenses. Taxpayers can cut their tax bills by adding up these deductions and taking the total off their taxable income.
Wealthy people can benefit more than those with lower incomes as their deductions lower their income in the highest tax bracket of 40 percent, while others would apply the deductions to their lower tax rates, saving them less money.
Creating a donations tax credit for those who do not claim deductions and improving enforcement of abuse were among the ideas suggested by experts and industry officials.
The charitable giving deduction is one of the 10 costliest individual "tax expenditures," or provisions of the tax code that favor certain groups or activities with preferential treatment.
Xavier Becerra, a California Democrat, said that despite the great work done by non-profit groups, the deduction must be examined so that taxpayer dollars were used effectively.
For example, he noted wealthier donors tended to give to organizations that do less than other groups to meet basic needs of the poor.
Because of the pressure to limit federal spending, he said, "this important sector does deserve some critical examination."
(Reporting by Kim Dixon; Editing by Kevin Drawbaugh and David Brunnstrom)