President Bush Presents His Tax Plans for Charitable Giving

Journal of Taxation of Exempt Organizations

The proposals are intended to increase charitable giving, but some may not work out that way.

Robert A. Boisture and Catherine E. Livingston are members, and Kristen A. Gurdin is an associate, in the Washington, D.C. firm of Caplin and Drysdale, Chartered.

As the Bush Administration and the 107th Congress get into high gear, it is clear that this year will see an unusually active debate about the federal tax treatment of charitable contributions. A major theme of President Bush’s campaign was his pledge to help mobilize "armies of compassion" to work through faith-based and other community organizations to help those in need. Using tax policy to increase charitable giving is an integral part of this "compassionate conservative" vision, and President Bush has called for four specific changes to advance this goal.

Most prominently, Bush advocates allowing nonitemizers to deduct charitable contributions in addition to claiming the standard deduction. He also supports permitting tax-free rollovers of IRA assets to charity, giving the states an incentive to create charitable tax credits for gifts to poverty-fighting charities, and increasing the percentage limit on corporate charitable deductions from 10% to 15% of taxable income. The combination of the President’s support and the availability of substantial budget surpluses to finance tax cuts means that these proposals are likely to get more serious consideration by Congress than they have in the recent past.

At the same time that he is proposing enhanced support for charitable giving, President Bush’s proposal to repeal the estate tax has sparked an intense debate about the potential adverse effect of repeal on charitable giving. Charities currently receive about $15 billion a year in charitable bequests. As America’s seniors transfer literally trillions of dollars to younger generations in the coming decades, there is real potential for charitable bequests to increase dramatically. Without the strong tax incentive for charitable giving provided by the estate tax, however, many fear the level of charitable bequests would be significantly reduced.

Plainly, charities have much at stake as the President and Congress roll up their sleeves and decide what to do about this rich menu of charitable giving proposals.


Since 1944, the Code has given taxpayers the option of either itemizing deductions or claiming the standard deduction. The percentage of taxpayers claiming the standard deduction has varied from a high of 82% in 1944 to a low of 58% in 1969; fluctuating around 70% in recent years.1 For two decades, charities have advocated a nonitemizer charitable deduction that would allow nonitemizers to deduct some or all of their charitable contributions in addition to claiming the standard deduction. In his budget message submitted to Congress on February 28, President Bush proposed such a nonitemizer deduction. More specifically, the Administration proposal would allow nonitemizers to deduct charitable contributions up to a ceiling equal to the amount of the standard deduction.2 The new deduction would be phased in over five years (20% of contributions would be deductible in year one, 40% in year two, etc.)

To put the proposal in context, it is useful to review the basic facts about current giving by nonitemizers. In 1998, nonitemizers gave an estimated $27.4 billion in charitable contributions, accounting for an estimated 20.4% of total individual giving.3 Nonitemizers’ charitable contributions represented 1.7% of their adjusted gross income, as compared with 2.4% for itemizers who reported making charitable contributions.4 Nonitemizers give a somewhat larger proportion of their charitable gifts to religious and human services organizations than itemizers, and a somewhat smaller proportion to education and arts organizations.

As noted above, creating a charitable deduction for nonitemizers is not a new idea. In fact, Congress enacted a charitable deduction for nonitemizers in 1981. That provision was phased in gradually over five years, from 1982 to 1986, and expired at the end of 1986. Charities’ efforts to secure permanent enactment of the nonitemizer deduction collided with the Tax Reform Act of 1986. That legislation broadened the tax base by paring back or eliminating a range of tax deductions to permit a significant reduction in marginal tax rates. In this very difficult legislative environment, the legislation to make the nonitemizer deduction permanent was narrowly defeated on the Senate floor.

Since 1986, charities have continued their advocacy of the nonitemizer deduction. The large budget deficits of the late 1980s and early and mid-1990s prevented significant legislative progress, but charities have built broad Congressional support for the nonitemizer deduction over the last four years. During the last Congress, nearly 150 members of the House of Representatives co-sponsored legislation that would have permitted nonitemizers to deduct charitable contributions in excess of $500 ($1,000 for married couples filing joint returns).5

The case for the nonitemizer deduction. In making the case for the nonitemizer deduction, proponents emphasize both its symbolic value in affirming the importance of charitable giving by all Americans and its efficacy as a stimulus for more giving and new givers.

At the level of symbolism, proponents argue that the Code is the most powerful tool available to the federal government for sending the message that we, as Americans, highly value and strongly support charitable giving. They argue that federal tax law should send this message to all Americans, not just to the 30% of generally upper-income Americans who itemize their deductions.

Beyond its symbolic value, proponents argue that the nonitemizer deduction would provide a strong stimulus for increased giving and new givers. In a recent report commissioned by Independent Sector, the National Economic Consulting Division of PricewaterhouseCoopers concluded that had the nonitemizer deduction, as proposed by President Bush, been in effect in 2000, total charitable giving would have increased by $14.6 billion—an increase of 11.2%. PricewaterhouseCoopers also concluded that the nonitemizer deduction would have stimulated charitable gifts by 11 million Americans who otherwise would have given nothing.6

This bullish assessment is not universally accepted. Other studies have concluded that giving may be considerably less responsive to changes in tax incentives than indicated by the PWC analysis.7

Experience with the 1980s nonitemizer deduction provides some support for the more bullish view. Between 1985 (when nonitemizers were allowed to deduct only 50% of their contributions), and 1986 (when nonitemizers’ gifts were fully deductible), total giving by nonitemizers increased by 40% according to IRS data.

Compliance and complexity issues. Over the two-decade debate on the nonitemizer deduction, critics have frequently argued that the IRS could not develop a credible audit program to police the charitable contribution deductions claimed by tens of millions of nonitemizers, and that the result would be widespread cheating unless Congress adopted a receipt requirement or similar safeguards.

In rebuttal, proponents argue that the compliance risk arising from the nonitemizer deduction is not qualitatively or quantitatively different from the compliance risk inherent in the itemizer deduction—a risk that Congress has been willing to accept since the earliest days of the federal income tax. In support of this view, proponents note that itemizers account for 80% of all giving, are allowed to claim a "first dollar" deduction (i.e, one not limited by a nondeductible "floor" amount) without obtaining written receipts excepts for gifts in excess of $250, and are rarely audited by the IRS. Itemizers thus face comparable temptations to overstate charitable giving—and present the IRS with a comparable compliance challenge—as would nonitemizers under a nonitemizer deduction.

Critics also note that the nonitemizer deduction would complicate nonitemizers’ computation of their income tax liability. Proponents counter that nonitemizers would be free not to deduct their charitable contributions and thus to continue computing their tax liability as under current law. They also note that incorporating the nonitemizer deduction into Form 1040A could be accomplished by adding only a single line to the form.

The floor issue. While President Bush has proposed that nonitemizers be allowed to deduct charitable contributions on a "first dollar" basis, there is likely to be strong pressure in Congress to impose a floor on the deduction. The most significant attraction is that a floor can significantly reduce the revenue cost of the deduction. The Joint Committee on Taxation has estimated that the Bush proposal—a nonitemizer deduction without a floor that is phased in ratably over five years—would reduce tax revenues by $51.7 billion over the ten-year period from 2002 to 2011. Even in the context of President Bush’s proposed $1.6 trillion tax cut, this is a very substantial price tag. By contrast, the Joint Committee has estimated that permitting nonitemizers to deduct 50% of their charitable contributions in excess of a $500 floor ($1,000 for married taxpayers filing jointly)—and without the gradual phase-in—would reduce tax revenues by approximately $35 billion over a comparable ten-year period.

Some floor proponents also argue that a floor would significantly increase the efficiency of the nonitemizer deduction by substantially reducing the tax cost while preserving most of the incentive effect for increased giving. Advocates of a floor argue that much of the tax loss associated with a first dollar nonitemizer deduction would be wasted since it would reward taxpayers for their current giving (i.e., for contributions they are willing to make without a tax incentive). In theory, the optimum incentive would reward taxpayers only for increases in giving. While such a theoretically optimum incentive is not workable in practice, imposing a floor on the nonitemizer deduction is arguably a significant step in this direction, since it would significantly reduce the "wasted" revenue loss attributed to current giving.8

Opponents counter that imposing a floor would dramatically reduce the nonitemizer deduction’s incentive to nongivers to become new givers, would complicate implementation, and would compromise the important symbolic message that all charitable contributions are tax deductible.

Prospects. While there is likely to be strong pressure in Congress to scale back the nonitemizer deduction—most likely by imposing a floor on the deduction—the prospects for enacting some form of nonitemizer deduction this year are far stronger than they have been since the deduction was allowed to expire in 1986.


During the last Congress, strong support emerged for allowing a direct tax-free rollover of IRA assets to charity. As explained more fully below, current law requires that an IRA owner who wishes to withdraw IRA assets and give them to charity generally must include the withdrawn assets in taxable income and then claim a charitable deduction. The donor may not be able to deduct the full amount of the transfer to charity, however. The deduction is limited by the adjusted gross income (AGI) percentage limits and, in some cases, by the 3% floor on itemized deductions. The new proposal would eliminate these potential problems by excluding the transfer to charity from the IRA owner’s taxable income.

While the basic concept of allowing tax-free rollovers of IRA assets to charity has enjoyed broad support in Congress, two issues related to the scope of the rollover have been hotly debated. The first relates to the age at which an IRA owner would be allowed to begin making tax-free rollovers. The coalition of charities spearheading the lobbying effort is pushing for 591/2, but Congress has thus far insisted on 701/2. The second key debate centers on whether the tax-free rollover should be available for transfers to charitable remainder trusts and other planned giving vehicles as well as for direct transfers to charity.

President Bush’s tax proposal would permit charitable IRA rollovers directly to charities beginning at age 591/2, but would not permit rollovers to deferred-giving vehicles.

Current law. Under current law, once an IRA owner reaches the age of 591/2, he or she may withdraw funds from the IRA without incurring a penalty. Once the owner reaches the age of 701/2, at least a specified minimum amount must be withdrawn every year for the rest of his or her life. The minimum amount is determined by a legally prescribed formula that takes into account the balance in the IRA, the owner’s life expectancy, and the age of any designated beneficiary named to succeed the owner after his death (but only if that beneficiary is a spouse more than ten years younger than the owner). Subject to one limited exception,9 the IRA owner must include all amounts withdrawn from the IRA in gross income, whether the withdrawal is mandatory or discretionary. All amounts withdrawn from an IRA are treated as ordinary income.

An IRA owner who elects to transfer funds from an IRA to charity still must include the full amount withdrawn in his or her gross income. If the owner is an itemizer, he or she may then claim a charitable contribution deduction for the amount contributed to charity. As noted above, two separate provisions can limit the size of the deduction. First, contributions of ordinary income property to public charities may not exceed 50% of the donor’s AGI for the year of the contribution. As a subcategory of this general limit, there is an additional limit on contributions of ordinary income property to private foundations, which may not exceed 30% of the donor’s AGI for the year of the contribution. To the extent contributions exceed these limitations, they may be carried forward and deducted for five years. Thus, if a donor with $100,000 of AGI contributes $40,000 to a public charity and $15,000 to a private foundation in a given year, he or she may deduct the full $40,000 gift to the public charity, and $10,000 of the gift to the private foundation. The remaining $5,000 from the private foundation gift may be carried forward for up to five years.

A second potential limitation applies to most itemized deductions claimed by taxpayers whose AGI is above a certain inflation-indexed threshold ($128,950 for the 2000 tax year). Taxpayers with AGIs above that level must reduce their total itemized deductions by the lesser of (1) 80% of their total itemized deductions (2) or 3% of the excess of their AGI over the threshold amount. Thus, a taxpayer with $300,000 of AGI and $50,000 of itemized deductions will lose the first $5,202 in deductions (3% of AGI in excess of $126,600). A taxpayer with the same AGI but only $6,000 of itemized deductions would lose only the first $4,800 of deductions (80% of $6,000).

Including an IRA withdrawal in AGI, regardless of whether it is a mandatory or discretionary withdrawal, also has an effect on eligibility for other tax benefits. For example, taxpayers can take an itemized deduction for medical expenses only if those expenses exceed 7.5% of their AGI. Thus, when an IRA withdrawal is included in a taxpayer’s AGI, it also increases the threshold that taxpayer must meet in order to deduct medical expenses. The effect can cut two ways, though. A taxpayer may claim miscellaneous itemized deductions (which include the deductions for interest, medical expenses, state and local taxes, charitable contributions, and casualty losses, among others) only if the aggregate of these deductions exceeds 2% of AGI. Including an IRA withdrawal in income and claiming an offsetting charitable contribution deduction will increase the threshold for claiming miscellaneous itemized deductions, but it will also add to the total of such deductions that count toward meeting the threshold, potentially creating a deduction for expenses that would otherwise not be deductible.

It also bears noting that, under current law, IRA owners can use their IRAs to benefit charity by naming a charity as the beneficiary that will receive any assets remaining in the IRA on the owner’s death. Until January of this year, naming a charity as the IRA beneficiary had the adverse effect of forcing the IRA owner to take larger annual minimum distributions than would have been required if he or she had named a child or other family member as the beneficiary. Recently issued regulations have solved that problem, however, making it possible to name a charity as an IRA beneficiary without affecting the size of the annual minimum distributions that must be withdrawn after age 701/2. The IRA owner can change the named IRA beneficiary at any time before his or her death.

Finally, many people hold retirement assets in qualified plans that are not IRAs. Under current law, a taxpayer can roll over his or her qualified plan retirement account to an IRA under certain circumstances. If a Section 401 plan or Section 403(b) plan allows in-service distributions, a taxpayer who has not yet retired can make a withdrawal from the plan and immediately roll it into an IRA.10 A taxpayer who has retired and is receiving certain kinds of distributions from the plan (a lump-sum distribution is one) can roll the distribution over into an IRA. However, if the taxpayer is retired and receiving other types of payments (such as payments for life), or if the taxpayer has not retired but is in a plan that does not permit in-service distributions, he or she cannot roll over retirement savings into an IRA. Thus, the rollover proposal could benefit not only individuals who want to make charitable contributions from an IRA, but also many individuals who want to make charitable contributions out of other qualified retirement plan assets.

The rollover legislation. Legislation was introduced in both 1999 and 2000 permitting IRA owners to withdraw funds from IRAs and transfer them directly to charity, without including the withdrawals in income, provided the owner had reached age 701/2. In 1999, the Senate passed legislation that would have provided this treatment for both direct and deferred gifts, but the conference version eliminated the deferred gift option. President Clinton ultimately vetoed the larger tax package that included the proposal. The proposal, again limited to direct gifts made by individuals who had reached age 701/2, was also included in the Conference Committee version of H.R. 1102, the Retirement Security and Savings Act of 2000, which passed the House but was not taken up by the Senate before Congress adjourned for the year. This limited version of the IRA charitable rollover has been reintroduced in the 107th Congress.11

The age threshold. As noted above, one of the two major issues related to the scope of the IRA rollover is the age at which owners would be allowed to begin tax-free rollover of IRA assets. The two options that have received serious consideration are 591/2 (the age at which IRA owners may begin to make penalty-free withdrawals) and 701/2 (the age at which they must begin making withdrawals), though Congress might ultimately decide to split the difference. This debate is not significantly revenue-driven, but rather focuses on the concern that if tax-free rollovers were permitted beginning at age 591/2, IRA owners might be induced by charitable fundraisers to make excessive and premature transfers to charity, leaving the donors without sufficient retirement assets. Proponents argue that this view is excessively paternalistic and continue to push aggressively for the lower age threshold.

Rollovers to planned giving vehicles. The second principal design debate involves whether transfers from IRAs to deferred giving vehicles should be tax-free rollovers. Opponents argue that this would give donors a tax benefit significantly in excess of the contribution received by the charity. Their concern is best explained using a simple example. Consider a 71-year old donor who wants to contribute $100,000 to a charitable remainder unitrust that will pay out 5% of its net asset value each year for the rest of his life. At his death, the remainder would go to charity. Under current law, if he funded the charitable remainder trust with $100,000 transferred from his IRA, he would have to include $100,000 in income and could claim a charitable contribution deduction of $55,429 (the present value of the remainder as calculated in accordance with the statutorily prescribed formula for a gift made the first week of February, 2001). Thus, he would owe tax on $44,571 of income. If the proposal were enacted to cover IRA rollovers to deferred-giving arrangements, he would disregard the entire $100,000 withdrawal and owe no tax.

Further, some critics have expressed concern that the IRA owner could use a deferred-giving arrangement to avoid the minimum distribution requirements that would otherwise apply if assets were left in an IRA. For example, if a donor placed the IRA assets into a charitable remainder trust that pays out the lesser of its net income or a fixed percentage of its assets each year, she could invest the trust assets in investments such as deferred annuities that would produce no current income. She could allow the assets to continue to grow on a tax-deferred basis inside the charitable remainder trust without having to pay out anything until she, as trustee, elected to trigger distributions from the trust. The current law allows taxpayers to enjoy these benefits from a charitable remainder trust, but only if the trust is funded with after-tax assets to the extent it is producing an income interest for the donor. The donor can also get continued deferral by leaving assets in the IRA, but in return, he or she will be forced to withdraw a prescribed amount each year.

Advocates for allowing donors to disregard amounts they withdraw from their IRAs and place in deferred-giving arrangements claim that tax revenues generally would not be affected. Donors who transferred IRA assets to planned giving arrangements before they reached 701/2 would likely owe tax on income they receive from those arrangements years before they would have been forced to owe tax on minimum distributions withdrawn from their IRAs. Furthermore, once the income beneficiary started to receive distributions from the deferred giving arrangement, such as a charitable remainder trust, the distributions would be larger because of the additional accumulation inside the trust and the way distributions are calculated. Therefore, the income beneficiary would owe more tax, making up substantially for the tax lost in earlier years when no income was received.

Charitable Accord and the National Committee on Planned Giving intend to fight hard to include favorable treatment for IRA withdrawals used to fund deferred-giving arrangements. They believe that as a practical matter, donors will not contribute IRA assets to deferred-giving arrangements if they will owe a tax on the transfer. The charities want to be able to lock in their interest in a portion of these assets, and like the certainty the deferred-giving arrangements give them. By contrast, if the donor simply names the charity as designated beneficiary of the IRA, there is the risk that the donor will drain the IRA before death, leaving the charity with nothing.

Effect on charitable giving. Although there are no dispositive data available to answer this question, development professionals believe strongly that this proposal would increase charitable giving. They confirm that they lose gifts when donors learn that they may owe tax on the transfer of an IRA to a charity, and they see the multitude of baby boomer retirements on the horizon. The financial services providers that manage many IRAs also offer charitable gift funds, meaning that they are already equipped to accept charitable contributions or move assets to specifically designated charities. It would be in the interest of these firms to give IRA owners highly streamlined options for transferring an IRA or a portion of each IRA distribution to charity.

Prospects. Of all of the charitable giving proposals discussed in this article, the IRA rollover would appear to have the best prospects for enactment. Its revenue cost is quite modest in relation to the likely size of this year’s tax bill,12 and the narrower version of the rollover (age 701/2, direct gifts only) has enjoyed broad support in Congress. Moreover, the Bush Administration’s support may induce Congress to lower the age threshold to 591/2.


In a position paper issued shortly after taking office, President Bush stated that he will propose federal legislation that would encourage states to provide tax credits for contributions to charities "addressing poverty and its impact."13

Under the Bush plan, states would be allowed to use up to 50% of the federal funds they receive under the Temporary Assistance for Needy Families (TANF) program to offset the revenue loss of a poverty-fighting tax credit.14 More specifically, states could use the federal funds to offset the costs of a credit of up to 50% of the first $500 that an individual contributed to charities dedicated to relief of poverty, resulting in a maximum credit of $250. Married couples could claim a credit for 50% of the first $1,000 so contributed, for a maximum credit of $500. The credit would be available against state income tax; if a state imposed no individual income tax, the credit could be taken against other state taxes. Past proposals indicate that for federal income tax purposes, taxpayers claiming such credits would be required to reduce their federal charitable deduction by an amount equal to the state credit.

Implementing the Bush plan would require an amendment to TANF, which is slated for reauthorization by Congress this year. Accordingly, the legislation will not be considered by the Congressional tax-writing committees (even though it involves encouraging the creation of state-level tax credits), but rather by the House Education and Workforce Committee and the Senate Health, Education, Labor and Pensions Committee.

Because the targeted charity tax credit has not been widely discussed, it is analyzed here in considerable detail.

State tax credits. A number of states have long provided narrowly focused tax credit incentives for contributing to specified types of charitable organizations. At least 20 states have some form of tax credit for donations to specified types of organizations dedicated to relief of poverty.15 In 1996, however, Arizona became the first—and still appears to be the only—state to enact legislation allowing tax credits for contributions to any organization engaged primarily in providing direct services to the poor. In 1998, the Beacon Hill Institute at Suffolk University produced a guide for policymakers encouraging the implementation of similar state charity tax credits and recommending TANF grants as a potential source of credit funding.16 At the time of the BHI study, at least eight states were considering legislation that would offer some form of tax credit for contributions to poverty-relief organizations.

Congress has previously shown some interest in encouraging states to offer such credits. In the 105th Congress, Republicans formed a bicameral coalition, known as the Renewal Alliance, which proposed a state tax credit for contributions to poverty-relief charities to be funded by federal TANF grant money. Senator Rick Santorum (R-Pa.) proposed a slightly different version of this credit as the Charity Empowerment Act of 1999, S.997, which was tabled in the Senate Finance Committee. The main features of that bill, which may provide the framework for the Bush Administration proposal, were as follows:

  • The states could use up to 50% of their federal TANF funds to offset up to 100% of state revenues lost as a result of allowing charity tax credits. Charitable contributions eligible for the federal income tax deduction would be reduced by the amount of state credits a taxpayer claimed.


  • To qualify for receipt of credit-eligible contributions, the predominant activity of the charity (at least 75% of all expenditures) would have to be providing direct services to the poor (individuals with incomes less than 185% of the poverty line) for the specific purpose of "preventing or alleviating poverty." Also eligible for the credit would be donations to "collection organizations;" i.e., entities that collected gifts and distributed 90% of monies received to qualifying charities. Charities that provided services regardless of the recipient’s income level could not qualify for credit-eligible contributions, even if contributions were earmarked for special poverty-relief projects.


  • Qualifying charities generally would have to satisfy detailed recordkeeping and reporting requirements. All charities would have to report the percentage of funds allocated to specified expense categories. Further, collection organizations would have to maintain separate accounting for revenues and expenses, and make publicly available information about any organization they funded. The bill would also require records of client incomes in certain cases, but would exempt organizations serving members of groups recognized as including primarily poor individuals, or organizations providing food and shelter.


  • Qualifying charities would have to devote at least 75% of their aggregate expenses to "poverty program expenses." This meant that at most 25% of the charity’s expenses could be attributed to management, general, lobbying, fundraising, legal services for poor clients, or payments to affiliates. States were strongly encouraged to require that qualifying charities limit their aggregate expenses for lobbying, client litigation, voter registration, and public policy advocacy or research to 5% of their total expenditures.


The case for targeted charity tax credits. The principal advantage claimed for target credits is that an additional incentive would encourage more help with minimal government action or expense.

Increasing resources for serving the poor. Charity tax credit proponents unabashedly argue that it is entirely appropriate to create a stronger tax incentive for gifts to poverty charities than for gifts to other charities as a way to increase the resources committed to the relief of poverty. In their view, expanding services to the poor is simply a more urgent social priority than expanding nonprofit services to the broader community, particularly because the gap between rich and poor is widening, and because charities serving the poor themselves do poorly in the competition for charitable contributions. Credit proponents note that the percentage of overall charitable giving going to human services organizations has been declining steadily for many years, and now totals less than 10% of total charitable gifts.17

The mechanism through which proponents predict that the charity tax credit would increase gifts to poverty charities is familiar and straightforward—the credit would reduce the after-tax cost of gifts to poverty charities and donors would respond to this lower cost of giving by increasing the amount of their gifts to this subgroup of charities. While there is strong empirical support for the core proposition—that when the cost of giving goes down the amount of giving goes up—several complex issues complicate the task of estimating the amount by which gifts would increase in response to the proposed credit.

First, it is important to note that the amount by which the charity tax credit would reduce the after-tax cost of gifts to poverty charities would vary widely according to the donor’s federal tax status. More specifically, the magnitude of the change in the after-tax cost of a gift would depend on the taxpayer’s marginal federal income tax rate and on whether the taxpayer would otherwise deduct the contribution in computing federal income tax liability.

For taxpayers who itemize deductions for federal income tax purposes, the charity tax credit would reduce state tax liability by the amount of the credit, but would increase federal tax liability by reducing the donor’s federal deductions for charitable contributions and for state taxes. In certain cases, the increase in federal tax liability could offset a very significant portion of the reduction in state tax liability, yielding a relatively small net reduction in this after-tax cost of gifts to poverty charities.18 This negative effect might not significantly reduce the stimulative effect of the tax credit on charitable giving, however, because donors might not be fully aware of the indirect negative effect of the state credit on federal tax liability.

Unless and until Congress enacts the nonitemizer charitable deduction, the effect of the charity tax credit would be less complicated and more substantial for nonitemizers. Specifically, the after-tax cost of giving a dollar to a poverty charity would fall from a dollar to fifty cents because the dollar gift would generate a 50-cent state tax credit and would not produce any offsetting increase in federal tax liability.

If Congress does enact a nonitemizer deduction, the tax benefit to nonitemizers of the charity tax credit would be reduced modestly by an offsetting increase in federal income tax liability because the federal charitable deduction for nonitemizers would be reduced by the amount of the state credit. For the many nonitemizers who are in lower federal income tax brackets, however, this reduction in the charitable deduction would produce only a modest increase in federal tax liability.

The second key variable in estimating the amount by which the charity tax credit would increase gifts to poverty charities is what economists term the "price elasticity" of giving—that is, the amount by which donors increase their charitable gifts in response to a given decrease in the after-tax cost of giving. Numerous empirical studies strongly confirm the existence of an inverse relationship between the cost of giving and the amount of giving. They diverge widely, however in their conclusions about the magnitude of the increase in giving in response to a given reduction in after-tax cost. Moreover, no econometric studies to date have specifically attempted a rigorous estimate of the likely effect of a state charity tax credit.

A third key issue is the extent to which the increase in giving to poverty charities would reflect an increase in overall charitable giving versus a redirection of contributions from other types of charities. Economic theory predicts that both effects would be present, but to date there has been no serious effort to predict their relative magnitude in the context of a targeted charity tax credit.

More efficient allocation of government social spending. Charity tax credit proponents also argue that using the credit mechanism to allow individual donors, in effect, to allocate up to half of TANF funding would increase the efficiency of poverty charities in two important respects. First, proponents believe that donors possess, or would develop over time, a greater capacity than government to distinguish effective poverty charities from ineffective ones, and would use the credit mechanism to direct resources to the most efficient charities. Further, proponents believe that because the charities would receive these resources as unrestricted private contributions—rather than as highly constrained government funds—the credit would significantly increase charities’ capacity to pursue innovative new program strategies.19

Increasing volunteerism and community involvement. Charity tax credit proponents also believe that the credit would increase volunteering and community involvement in addressing the needs of the poor. Under the current system, taxpayers generally have little if any awareness of how TANF funds are being used in their communities. Moreover, they are not invited, in their capacity as taxpayers, to become directly involved as volunteers in supporting the work of the TANF-funded organizations.

By contrast, the credit system would encourage individuals to contribute to one or more poverty charities in their community. Once an individual begins to make financial contributions to local poverty charities, the charities would be highly likely, through their continuing fundraising appeals, to educate potential donors about their charitable programs. In many cases, the charities would also attempt to involve donors as volunteers. Thus, proponents assert, the credit has the potential to promote volunteering and civic engagement in ways that the current system lacks.

Increasing support for faith-based organizations. Proponents also see the credit as a constitutionally permissible tool of welfare reform for "transform[ing] the government monopoly to faith-based diversity,"20 and as an alternative to what some proponents view as the highly problematic funding opportunities for faith-based organizations created under the charitable choice provisions of various federal social service statutes.

In 1996, the Personal Responsibility Work Opportunity Reconciliation Act first provided for "charitable choice," under which faith-based organizations have been able to provide social services through government contracts or acceptance of government vouchers subject to less stringent requirements as to separating government-funded services from religious activities.21 Since 1996, charitable choice provisions have been added to three additional federal social service programs (see the sidebar above). These provisions allow organizations to retain their religious character, to conduct the federally funded programs in religious facilities, and to include privately funded religious components in programs partially funded with federal funds.

Notwithstanding these liberalizations, the charitable choice rules continue to prohibit the use of funds provided directly from government (though not voucher funding) for "sectarian worship, instruction, or proselytization."22 Further, religious organizations receiving government funds—whether directly or through vouchers—may not deny services to an individual on the basis of religion, religious belief, or refusal actively to participate in a religious practice, and must allow program participants to opt out of religious activities even if the charity sees this religious participation as central to the effectiveness of its programs.23

Many faith-based service providers have declined to seek charitable choice funding because of these restrictions. These organizations believe that the religious elements of their programs are inseparable from the social services they provide, and that allowing participants to opt out of religious activities fundamentally compromises their programs’ purposes and effectiveness.

Tax credit proponents view the credit as providing a constitutionally defensible way for faith-based service providers to, in effect, benefit from available TANF funds while avoiding the government regulations that charitable choice funding entails. While states are permitted to use TANF funds to offset the cost of the credit, proponents argue that this should not transform the private contributions stimulated by the credit into the functional equivalent of government expenditures. In this view, the donor’s private choice breaks the legal chain of causation between government and faith-based organizations.24 Thus the credit should not be viewed as violating the Establishment Clause any more than charitable contributions stimulated by the federal income tax charitable deduction should be treated as government expenditures subject to First Amendment restrictions. Just as with these latter contributions, gifts stimulated by the charity tax credit would be truly private, reflecting the decisions of individual donors about where to direct their personal charitable gifts.

The case against targeted charity tax credits. Despite its appealing aspects, critics say that inherent problems with the credit make it a net negative.

Undermining the framework. Critics of the charity tax credit argue that it would undermine two central aspects of the American legal framework for charity—the broad "community benefit" concept of charity and the principle that, within this broad definition of charity, government should not seek to influence donors’ free choice about how to direct their charitable gifts.

Over the decades, American courts and legislatures have consistently rejected efforts to limit the class of tax-favored charities to those organizations primarily engaged in the relief of poverty. Instead, courts and legislatures across the country have embraced a far broader definition of charity that encompasses not only service to the poor but also the advancement of education, religion, health, science, and art, as well as preservation of civil rights and the environment, and a range of other activities judged broadly beneficial to the community.

For nearly a century, federal tax law has strongly encouraged gifts to this full range of charities on a more or less even-handed basis, rather than singling out gifts to poverty charities as deserving stronger tax incentives.25

This broad legal definition of charity and the strong and even-handed tax incentives federal tax law provides for gifts across this full range of charities are generally regarded as having been major factors contributing to the strength and diversity of America’s charitable sector. Moreover, a strong case can be made that broad-based charities serving the full range of income groups within the community on an ability-to-pay basis are more effective than narrowly focused poverty charities in mobilizing resources and helping the poor enter the mainstream of community life. Likewise, charities offering programs designed to prevent individuals and families from falling into poverty may be more cost-effective than programs trying to help people climb back out of poverty.

Based on this line of analysis, critics argue that adoption of the charity tax credit would cut strongly against the core principles of the American charitable sector. By creating a special incentive for gifts to poverty charities, the credit would strongly imply that relief of poverty is more meritorious than other charitable activities that benefit the community more broadly. Critics fear that this could lead to unproductive competition and conflict among various components of the charitable sector as they vied to convince Congress and state legislatures to grant them similarly favored tax status.

Possible reduction in available resources. Even without a charity tax credit, donors already make substantial charitable contributions to poverty charities. To the extent that these existing contributions qualified for the charity tax credit, they could soak up TANF funds to finance the credit without increasing private contributions to poverty charities. For example, if a state were to dedicate $5 million of TANF funds to offset the cost of a charity tax credit, and if poverty charities in the state already received $4 million of credit-eligible contributions, offsetting the cost of a 50% credit for the $4 million of existing contributions would absorb $2 million of TANF funds without producing any significant increase in private giving. To increase overall poverty funding, the credit would have to stimulate over $4 million in new gifts.

Credit opponents also fear that to the extent the credit stimulated increased giving to poverty charities, a very substantial portion of this increase might come from donors redirecting part or all of their existing giving away from other types of charities to poverty charities, rather than from an increase in total giving. As noted above, no serious effort has been made to estimate the magnitude of this potential substitution effect.

Equity and efficiency concerns. Critics of the charity tax credit argue that proponents are simply naive in their belief that donors will have the inclination and capacity to evaluate the relative effectiveness of various poverty charities. Instead, critics argue, donors’ giving decisions are more likely to reflect the sophistication of competing charities’ fundraising efforts rather than the relative effectiveness of their programs.

Critics also warn that donor control of social service funding could further marginalize groups already marginalized because of their geographic location, ethnicity, or religious beliefs. Such a disparity might occur in various ways. For instance, people with the financial means to make significant credit-eligible contributions are much more likely to live in affluent suburbs than in impoverished inner city neighborhoods in the same state. These donors may be more likely to give to the poverty charities in their community than to charities in the much more needy urban neighborhoods they seldom visit. Thus, the credit could dramatically increase revenues for a food bank serving a few hundred needy families in a predominantly affluent community while simultaneously causing an inner-city shelter supporting a larger population to lose government funding (since up to 50% of existing TANF grants could be diverted to offset the cost of the credits). Moreover, the inner-city shelter probably could not fund the sort of intensive fundraising effort that would be necessary to overcome this competitive disadvantage.

Inappropriate restrictions on charities. Critics also charge that the charity tax credit would impose burdensome and inappropriate restrictions on charities serving the poor. For example, previous credit proposals have required that qualifying charities (other than soup kitchens and homeless shelters and those serving populations recognized as including primarily poor individuals) maintain client income records proving that clients are below 185% of the poverty line. Collecting such client income data would be highly intrusive and would require charities to commit resources to record keeping that could otherwise be used to serve the poor.

Opponents also object to the limitations the credit would impose on qualifying organizations’ administrative and advocacy expenditures. The most broadly discussed credit proposal would require that all qualifying charities limit their administrative expenses to 25% of their budget. Further, previous bills have recommended that states limit qualifying organizations to spending no more than 5% of their total budget on lobbying, advocacy, public policy research, and voter registration.

Critics view both sets of expense restrictions as problematic. To attract donors, many poverty charities would have to create and build sophisticated fundraising programs, but may have great difficulty in funding this effort—along with other administrative costs—within the proposed 25% limit. Further, this restriction may well be unconstitutional.26 Likewise, the recommended ceiling on advocacy expenses could limit poverty charities’ ability to speak out on behalf of their clients in the public policy process.

Prospects. The prospects for the targeted charitable tax credit proposal are considerably more difficult to assess than the tax proposals discussed above. Much may depend on the precise form of the Administration proposal. The various weaknesses noted above that are inherent in the core concept will likely prove significant barriers to enactment, however.


President Bush has also proposed increasing the limit on corporate charitable deductions from 10% to 15% of a corporation’s taxable income. This proposal would appear to be more about symbolism than substance, since very few corporations currently make charitable contributions of even 5% of taxable income, much less 10%. Nonetheless, since there would appear to be no compelling tax policy rationale for any percentage limit on the corporate charitable deduction, and since the proposal could benefit a small number of exemplary corporate citizens, it is probably best regarded as a modest step in the right direction.


No discussion of current tax issues affecting charitable giving would be complete without at least brief discussion of President Bush’s proposal to repeal the federal estate and gift tax and the potential impact of repeal on charitable giving.

Background. Under current estate and gift tax rules, an individual can transfer up to $650,000 to heirs tax free,27 but amounts in excess of this unified credit are subject to estate tax at tax rates that increase from 37% to 55% as the size of the taxable estate increases. Under legislation enacted in 1997, the unified credit will increase to $1 million by 2006.

In 1999, the estate and gift tax generated $28 billion, about 1.5% of total federal revenue. Estate tax liability is highly concentrated among wealthy Americans. Less than 2% of all estates owe any estate tax, and more than half of all estate tax is paid by estates with a value in excess of $5 million.28

The existing estate and gift tax rules provide for an unlimited charitable deduction, which dramatically reduces the cost of charitable gifts and bequests for wealthy individuals. For example, the after-tax cost of a charitable bequest is only 45 cents on the dollar for an individual facing the top estate tax rate of 55%.

In 1999, charitable bequests totaled an estimated $15.5 billion, representing 8.2% of total charitable giving.29 Of those bequests, 65% came from estates of $5 million or more, and 56% of bequests came from estates of $10 million or more. IRS data indicate that bequests to private foundations and to educational, medical, and scientific organizations account for over 60% of all charitable bequests.30

Effect of repeal on charitable giving. Not surprisingly, the effect of estate tax repeal on charitable giving is hotly debated.31 Proponents of repeal argue that eliminating the estate tax would actually increase charitable bequests because, without estate tax liability, wealthy individuals could provide for their children and other heirs and have more wealth left to give to charities.

The opposing view argues that this positive "wealth effect" of repeal would be more than offset by a countervailing "price effect." For wealthy individuals facing the top estate tax rate of 55%—donors who account for well over half of all charitable bequests—the cost of a charitable bequest would increase from 45 cents on the dollar to a full dollar. Most economists who have analyzed the issue believe that such a dramatic increase in the price of giving would produce a significant drop in the amount of giving. For example, in a recent study, Paul Joulfaian of the Treasury Department used various models to assess the impact of repeal on charitable bequests and concluded that the decline in charitable bequests would probably fall within the range of 13% to 31%.32

It remains to be seen how much weight Congress will give to the potential adverse effect on charities as it considers President Bush’s repeal proposal.


America benefits from a vigorous charitable sector and a long tradition of charitable giving. The motives for charitable giving and volunteering are deep and complex, rooted for most Americans in religious and moral conviction about what it means to be a responsible citizen in a free society. However, it is the rare charitable fundraiser who does not believe that our strong tax incentives strongly reinforce Americans’ moral commitment to charitable giving.

This year, Congress and the President have the opportunity to significantly strengthen those tax incentives for all Americans. Enacting the nonitemizer deduction would encourage giving by the tens of millions of lower- and middle-income Americas who currently receive no tax incentive for their charitable gifts. The IRA rollover would encourage middle- and upper-income Americans who have excess retirement savings to share their good fortune with others through increased charitable giving. Finally, preserving the estate tax, with its incentive for charitable bequests, would encourage the wealthiest Americans to continue to provide the leadership gifts so important to the continued vitality of the charitable sector.

Even as Congress and the President consider these measures to increase overall charitable giving, the debate should continue about whether and how federal tax policy should endeavor to increase the percentage of overall charitable giving going to organizations that serve the poor. The targeted charitable tax credit proposed by President Bush and others is seriously flawed, but many find the goal toward which it aims—getting more resources to the charities serving those most in need—to be compelling. Whether this goal can be achieved through the federal tax system without undermining the important principle of donor choice is a difficult question, but one that deserves serious thought.


1 The legislative history indicates that Congress established and has maintained the standard deduction both to make it easier for taxpayers to compute their income tax liability and to reduce the need for IRS audits of income tax returns. That history does not discuss the relationship between the standard deduction and the charitable contributions deduction, or the effect of the standard deduction on charitable giving.

2 The standard deduction for the 2001 tax year is $4,550 for single returns and $7,600 for joint returns.

3 Urban Institute Center on Nonprofits and Philanthropy, Profiles of Individual Charitable Contributions by State, 1998. IRS Statistics of Income data indicate that in 1998 itemizers made charitable contributions totaling $107.4 billion. Giving USA estimates total 1998 individual charitable contributions at $134.8 billion. The $27.4 billion estimate for 1998 nonitemizer giving is derived by taking the difference between these two numbers.

4 Independent Sector, Giving and Volunteering, page 2 (1995).

5 In its final budget proposal, in February 2000, the Clinton Administration proposed a nonitemizer charitable deduction subject to both a substantial floor and a 50% limitation. Specifically, nonitemizers would have been permitted to deduct 50% of contributions in excess of $1,000 during tax years beginning after 2000 and 50% of contributions in excess of $500 for tax years beginning after 2005.

6 PricewaterhouseCoopers & National Economic Consulting, Incentives for Nonitemizers to Give More: An Analysis (January 2001).

7 For a very useful analysis of the implications of this range of estimates, see Cordes et al, Extending the Charitable Deduction to Nonitemizers: Policy Issues and Options, (The Urban Institute, May 2000).

8 E.g., Steuerle, "The Right Way to Extend Charitable Deductions to Nonitemizers," 86 Tax Notes 1297 (2/28/00), "Nonitemizers Charitable Deduction: The Administration’s Floor Plan," 86 Tax Notes 1625 (3/13/00). Gene Steuerle of the Urban Institute has recommended taking the floor concept a step further by applying a common dollar floor to both the nonitemizer and the itemizer deduction, while simultaneously moving the itemizer deduction "above the line," thereby reducing adjusted gross income and taking all charitable contributions out of the "3% floor" limitation that substantially reduces the value of the charitable deduction for many itemizers.

9 The exception applies where an IRA owner has basis in his or her account as a result of nondeductible contributions. Basis is treated as being withdrawn ratably and is not taxable when withdrawn.

10 The withdrawal can be rolled over to an IRA only to the extent it does not consist of certain hardship withdrawals or after-tax amounts.

11 Senator Kay Bailey Hutchison (R-Tex.) has introduced this proposal again this year as S. 205. Senators Richard Durbin (D-Ill.), Barbara Boxer (D-Cal.), and Carl Levin (D-Mich.) are co-sponsors.

12 In 2000, the legislative proposal that would have permitted both direct and deferred gifts starting at age 591/2 was scored by the Joint Committee on Taxation as costing $3.1 billion over ten years. The version that would have permitted direct gifts only starting at age 70/2 was scored as costing $2.6 billion over ten years.

13 Bush, Rallying the Armies of Compassion (2/12/01). President Bush’s proposal does not encompass federal tax credits for charitable contributions, but Rep. J.C. Watts (R-Okla.) has previously proposed a similar credit at the federal level, and a staff member from his office indicates that he plans to re-introduce his bill proposing a federal charity tax credit.

14 TANF replaced the Aid to Families with Dependent Children (AFDC) federal entitlement program with single, capped block grants to individual states for the provision of services to needy families. The President’s plan does not envisage additional TANF appropriations to fund the proposed credits. Rather, up to 50% of the TANF funds that a state currently receives could be redirected to this purpose, thus reducing by up to 50% the federal funding available for the state’s regular TANF program.

15 Since 1967, Pennsylvania has offered tax credits for up to 50% of the contributions that businesses make to neighborhood assistance and economic development programs. In 1982, Idaho enacted a 50% credit for contributions individuals make to specified youth rehabilitation facilities, with a maximum credit of $100. Since 1984, Indiana has allowed a credit against adjusted gross income for 50% of amounts invested in approved neighborhood assistance programs. Missouri allows businesses or individuals in business to receive credits against various state taxes for up to 50% of contributions made to certain urban community development projects and up to 70% of contributions made to rural community projects.

16 Beacon Hill Institute, The Next Step Toward Welfare Reform: A Manual for Enacting Tax Credits For Charitable Contributions (1998).

17 Abrams and Eisenberg, "Can a Charity Tax Credit Help the Poor?" 11 The American Prospect 78 (Jul/Aug 1999).

18 For example, for a donor with a 30% marginal federal tax rate, a $1,000 credit to a qualifying poverty charity would reduce state tax liability by $500, but increase federal tax liability by $300. This would happen because (1) the donor’s federal charitable contribution deduction would be reduced by the amount of the $500 credit and (2) the donor’s federal deduction for state taxes would be reduced by a further $500. Thus, the credit decreases the taxpayer’s overall tax bill (state and federal) by $200.

19 Conservative and liberal charity tax credit proponents alike view freedom from the restraint of government funding as a primary benefit of the credit. See, e.g., Abrams and Eisenberg, supra note 17; Olasky, Compassionate Conservatism, 186-187 (Simon & Schuster, 2000).

20 Olasky, supra note 19 at 4.

21 42 U.S.C. section 604a.

22 42 U.S.C. section 604a(j).

23 42 U.S.C. section 604a(f).

24 See, e.g. Mueller v. Allen, 463 U.S. 388 (1983) (upholding a state deduction for expenses incurred in providing tuition, books, and transportation to children at both public and private schools); Witters v. Washington Dept. of Services for the Blind, 474 U.S. 481 (1986) (upholding grant to blind student who used the grant at a religious school); and Mitchell v. Helmes, 120 S. Ct. 2530 (2000) (affirming the principle of private choice).

25 The most significant set of preferences in the federal tax rules governing charities—the automatic public charity status conferred on schools, churches, and hospitals—runs in the other direction. These organizations are favored by virtue of the broad community benefit they confer. Poverty charities receive no comparable preference.

26 The Supreme Court has repeatedly held that fundraising regulations are subject to First Amendment constitutional protections of free speech. See e.g., Riley v. Nat. Fed. of the Blind, 487 U.S. 781 (1988), aff’g 817 F.2d 104 (CA-4, 1987) (finding unconstitutional both arbitrary caps on fundraising fees and requirements that fundraisers disclose to donors the amount of their contributions the charity received); Secretary of State of Maryland v. Munson, 476 U.S. 947 (1984), aff’g 448 A.2d 935 (Md., 1982) (finding unconstitutional a statute limiting a charity’s fundraising expenditures to 25% of its overall budget); Schaumberg v. Citizens For a Better Environment, 444 U.S. 620 (1980), aff’g 540 F.2d 220 (CA-7, 1978) (finding unconstitutional an ordinance requiring that a charity to spend 75% of its budget on charitable expenditures).

27 Current law also allows unlimited tax-free transfers to the individual’s spouse.

28 Gale and Slimrod, Resurrecting the Estate Tax, Brookings Institution Policy Brief No. 62, (June 2000).

29 The AAFRC Trust for Philanthropy, Giving USA 2000: The Annual Report on Philanthropy (2000).

30 Internal Revenue Service, "Federal Estate Tax Returns 1995-97," SOI Bulletin 90-107, Tables 1a-1c, (Summer 1999).

31 For a careful and balanced discussion of the effect of repeal on charitable giving, see Rooney and Tempel, "Repeal of the Estate Tax: Its Impact on Philanthropy" (working paper), The Center on Philanthropy at Indiana University (11/1/00).

32 Joulfaian, "Estate Taxes and Charitable Bequests by the Wealthy, Working Paper," National Bureau of Economic Research (April 2000).


‘Charitable Choice’ Foretells Litigious Future for Faith-Based Initiatives

The charitable choice idea has been extended since its introduction into federal law in 1996. The Human Services Reauthorization Act of 1998 incorporated charitable choice into the Community Service Block Grant program (42 U.S.C. section 9812a). The Children’s Health Act of 2000 incorporated charitable choice into treatment programs administered by the Substance Abuse and Mental Health Services Administration (42 U.S.C. section 300x-65). The Community Renewal Tax Relief Act of 2000 expanded charitable choice to include both drug abuse treatment and prevention programs (42 U.S.C. section 290aa).

Charitable choice has not been introduced without controversy, however. Currently (and perhaps, predictably), a number of lawsuits are challenging the constitutionality of charitable choice. In American Jewish Congress v. Bernick (filed 1/31/01, San Francisco County Superior Court, Calif., Docket No. 317-A96), plaintiffs allege that the California Development Department earmarked $5 million for faith-based groups only. In American Jewish Congress v. Bost (filed 7/24/00, 53rd Dist. Ct., Tex., Docket No. GN002076), plaintiffs allege that a welfare-to-work program in Texas used state funding to buy Bibles and fund Bible instruction. In Freedom From Religion Foundation v. Thompson (filed 10/12/00, DC Wisc., Docket No. 00-C-617-C), plaintiffs challenge state funding of a Wisconsin faith-based version of the Alcohol Anonymous rehabilitation program. Finally, in Pedreira v. Kentucky Baptist Homes for Children (filed 7/14/00, DC Ky., Docket No. 3:00-CV-210-5), the American Civil Liberties Union and Americans United for the Separation of Church and State challenge the discriminatory firing of a lesbian care worker by a faith-based organization receiving federal funds, arguing that a group may not restrict state-funded salaries to people of certain religious beliefs and practices.

Despite the potential controversy, the "faith-based initiative" is moving forward in Congress.


Members Introduce Charitable and Faith-Based Proposals

Bipartisan legislation to implement Administration proposals was announced by members of both houses of Congress on March 22.

On the Senate side, a bill described in the press as avoiding the more controversial aspects of the President’s proposals was announced by Senators Joseph Lieberman (D-Conn.) and Rick Santorum (R-Penn.). In addition to a creating a nonitemizer deduction and an IRA rollover, their "Savings Opportunity and Charitable Giving Act" would expand the deduction for contributions of food, and would provide tax credits to financial institutions providing "Individual Development Accounts" (IDAs).

More wide-ranging was the "Community Solutions Act" announced by Representatives J.C. Watts (R-Okla.) and Tony Hall (D-Ohio). In addition to provisions paralleling the Senate proposal, the House plan would address the President’s faith-based initiatives. President Bush announced that he welcomed both bills.

Nonitemizers. The Senate proposal puts a $500 "floor" ($1,000 for joint filers) under the nonitemizer deduction. The deduction would be phased in over five years, starting with a deduction equal to 50% of giving above the floor in the first year. The House proposal has neither floor nor phase-in, but would be capped at an amount equal to the standard deduction.

IRAs. The House proposal would allow a rollover by any IRA owner who reached age 591/2. The Senate proposal does not mention an age limit but would, like the House version, allow rollovers to planned giving vehicles.

Food donations. Both proposals would extend the deduction for contributions of food—now limited to corporate donors—to all business taxpayers, including farmers and restaurants. The deduction also would be raised to the full fair market value of the food, as determined by recent sales.

IDAs. IDAs would be savings accounts held by working-poor families and matched, dollar-for-dollar, by the savings institutions, which would be reimbursed via a dollar-for-dollar tax credit. The matching (and the credit) would extend only to the first $500 deposited each year and held for any of three purposes: (1) buying a first home, (2) post-secondary education or training, and (3) starting or expanding a small business.

Liability. Under a provision of the House proposal, a business that donated property or equipment to a charity would not have civil liability for a death or injury resulting from the use of that property or equipment.

Charitable choice. The House proposal went into some detail on "charitable choice." It proposes extending charitable choice (see the sidebar on page 244) into several new areas, ranging from child and senior care to crime prevention to community development. The bill, once drafted, would prohibit the use of funds for "sectarian worship, instruction, or proselytization."

The proposal also sets out something like a "bill of rights" for both the faith-based organizations and the "beneficiaries" of their services. The organizations would be guaranteed no government interference in (1) the "definition, development, practice and expression" of their faith, (2) their "internal governance," and (3) their use of art, icons, scripture, or other religious symbols. A faith-based organization participating in the program could require that its employees adhere to the religious practices of the organization.

Individuals who object to the religious character of the organization providing a program would be guaranteed the right to an alternative, non-religious program. The organizations could not discriminate against beneficiaries on the basis of religion, a religious belief, or refusal to hold a religious belief.

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