By Matthew Bigg
ATLANTA, Feb 26 (Reuters) - Proposed tax law changes in President Barack Obama’s budget could hit charities hard even as demand for their services rises due to the worst recession in decades, U.S. charitable groups warned on Thursday.
Under the plan announced in Obama’s budget on Thursday, deductions on charitable contributions for people earning $250,000 a year or more would be limited to 28 percent, down from the current 35 percent.
Charities that provide services to people hurt by the deepening recession say requests for their services are on the rise despite a shortfall in revenues as wealthy donors grow nervous about their own financial situations.
Charitable organizations have also been squeezed by a credit crunch that makes it harder to secure bank loans and by shortfalls in state and local government budgets that can lead to delayed payments for services.
"This change could be a disincentive to some donors who might further cap their gifts on account of the new limit," Diana Aviv, president of Independent Sector, a coalition of 600 charities, foundations and other groups, said of the tax proposal.
"This may not be the best time to do that given that the needs that the sector is trying to provide for have gone up and the resources available have gone down," said William Gale, vice president of the Brookings Institution think tank.
The proposed tax change attempts to remedy a situation in which wealthier people can gain bigger tax reductions by giving to charities, or nonprofit organizations, analysts said.
"Those changes in the tax code are to generate revenue ... some of it dedicated to healthcare reform," Senate Assistant Majority Leader Richard Durbin said.
"I‘m not sure what impact it would have on charities. I don’t know if very wealthy people at that level really make this kind of fine calculation when they show some compassion for different causes," he told reporters.
There were 1.9 million nonprofit groups in the United States in 2006 accounting for 5 percent of GDP, according to figures from Independent Sector. All are exempt from federal income tax.
The most prominent include the Red Cross and the Bill and Melinda Gates Foundation, but such organizations range from soup kitchens to religious congregations and cultural groups and the National Rifle Association.
Many charities helping people caught in the economic downturn such as the elderly poor, the homeless and the mentally ill say they are busier than in past recessions because the downturn is affecting broader sections of the population.
Demand for food has risen significantly in the past five months, said Bill Bolling, executive director of the Atlanta Community Food Bank.
Local donors have increased their giving in response. But Bolling voiced fear the effort could be hard to sustain as the recession persists into the summer when demand for free food rises because children from low-income families are not at school to receive meals.
"We are already seeing (donor) fatigue at the community level stretching every resource," said Bolling, adding the proposed changes would hit cultural groups particularly hard.
Estimated giving in the United States reached $306 billion in 2007, and seven out of 10 households gave to charitable causes, according to figures from the Center on Philanthropy at Indiana University.
But Dorothy Brown, professor of tax law at Emory University, said she doubted wealthier people would be deterred from giving because of the proposed change and said studies on the subject were inconclusive.
"I understand nonprofits are worried. Part of this worry could be a political ploy to say, ‘Don’t take it (the tax exemption rate) lower than 28 percent,'" she said. (Additional reporting by Richard Cowan in Washington; Editing by Peter Cooney)