It sounds like an old fashioned and now politically incorrect joke to begin a piece with: “A priest, a minister and a rabbi were …………” But, in fact, the priest, the rabbi and the minister are joined by the hospital president, the university president and the museum chairman in a uniform high level of concern about one of President-Elect Trump’s tax proposals. President-Elect Trump’s proposal to limit all itemized deductions to $200,000 could and probably would seriously reduce or eliminate large monetary gifts to our major charitable institutions by wealthy taxpayers.
The Trump plan to limit itemized deductions to $200,000 would effectively eliminate any tax deduction for charitable gifts by any wealthy taxpayer living in a high tax state. It would create the unintended consequence that wealthy taxpayers who annually contribute even relatively small amounts (15%) of their annual income to charity would see their income taxes increase under the Trump plan while wealthy taxpayers who contribute nothing to charity would see their income taxes decline.
This is the world of unintended consequences and is the reason that a President of the United States proposes legislation, the Congress discusses and improves such legislation before it appears on the President’s desk for signature.
The philanthropic problem included in President-Elect Trump’s plan is that a taxpayer in New York or California is faced with a 10% or more income tax rate and therefore wealthy, generous taxpayers will see the combination of their state taxes and contributions exceed the $200,000 proposed limitation. The individual with a little over $2,000,000 of income would receive no tax benefit for his/her charitable contributions. In fact, the Trump proposal would actually raise income taxes for the philanthropic while reducing income taxes for the non-philanthropic.
There are two realities here that are important. The first reality is that the promised Trump tax decrease would in actuality be a significant increase in taxes for wealthy taxpayers who are generous to our charitable institutions. These individuals were promised tax decreases, not tax increases. Historically, the idea has been to encourage charitable donations, especially among the wealthy.
The second reality, far more important than the first reality, is that charitable institutions will be hurt and probably hurt badly should there be a limitation of itemized deductions that includes contributions. It is not the money in the collection plate that builds new facilities. It is the money received from wealthy donors. When one walks through any hospital or college campus, one sees the names of wealthy donors on the front of laboratories, operating rooms, dormitories and classroom buildings. The individuals named gave the money to these institutions and received tax deductions for their charitable gifts.
Today, a charitable gift of $1,000,000 costs the donor about $600,000 after tax benefits. Under the Trump plan, the donation would cost the wealthy donor a full $1,000,000. It is axiomatic that charitable gifts would decline if the Trump limitation of $200,000 for itemized deductions were enacted. The losers would be the church goers, hospital patients, university students and about anyone who uses the services of any major charitable organization.
The stick in the eye of course would be seeing non-charitable individuals having their taxes go up while non-charitable individuals would see their taxes go down.
Not the end of the world as Congress can and will undoubtedly fix this issue before any legislation is put on the President’s desk. Tis only a warning that all legislation fixing any problem will have unintended consequences. President –Elect Trump does not want to kill off churches, hospitals etc. The trick is to insure that the unintended consequences of any plan do not cause serious harm to the country