Statement of the Hon. Philip M. Crane, a Representative in Congress from the State of Illinois

Testimony Before the Subcommittee on Human Resources and
Subcommittee on Select Revenue Measures
of the House Committee on Ways and Means

Hearing on H.R. 7, the "Community Solutions Act of 2001"

June 14, 2001

Mr. Chairman, thank you for inviting me here this morning to offer testimony on charitable giving, a subject near and dear to my heart. Charitable organizations perform an enormously important service to people of all races and ages. I have introduced three separate bills, each of which encourages charitable giving. I would like to say a few words about such giving in general, and then I will discuss each bill separately.

Mr. Chairman, from spiritual counseling to rape crisis centers, charitable organizations are vital to the health and well-being of American citizens. Charity benefits both the giver and receiver in like proportions. The act of giving elevates the heart of the giver. The act of receiving elevates the condition of the recipient. Charity is thus a blessed act that should suffer no discouragement from something so mean as the tax code, which contains absurd, yet very real, disincentives to individuals willing and able to exercise the gift of charity. Such disincentives have terrible consequences in reducing the resources available to private organizations. And while it is hard to imagine an individual who gives for the purpose of getting a tax deduction, nevertheless taxes can affect the amount an individual is willing to give.

We now have an excellent opportunity to advance sound tax policy and sound social policy by returning to our Nation's historical emphasis on private activities and personal involvement in the well-being of our communities. My three bills, the Charitable Giving Tax Relief Act, the Charitable Contributions Growth Act, and the IRA Charitable Rollover Incentive Act, will significantly increase the resources available to our charitable organizations.

The first bill, Mr. Chairman, the Charitable Giving Tax Relief Act, will allow non-itemizers to deduct 100 percent of any charitable contributions up to the amount of the standard deduction. Under current law, while non-itemizers receive the standard deduction, only itemizers can take a deduction for their charitable contributions. I introduced this bill, H.R. 777, on February 28^th, and it has been incorporated into H.R. 7.

Non-itemizers are predominantly low- and middle-income taxpayers who as a group give generously to charitable causes. However, lacking a specific deduction for their charitable contributions, there can be no question that they face a disincentive to making charitable contributions relative to itemizers, who tend to be upper-middle income and upper-income taxpayers. This certainly appears unfair. But, more importantly, it means charitable organizations supported predominantly by lower-income individuals are even more strapped for financial support than they need be. For example, churches serving lower-income communities have fewer resources to address the needs of their congregations as a result of this disincentive. If a young couple, struggling to make ends meet, nevertheless wants to give $20 to their church, they certainly should not be discouraged from doing so!

I introduced similar legislation in the 106^th Congress, and 149 Members signed on as co-sponsors. I have made two important changes to last year's bill, however. First, taxpayers will now be able to deduct the full amount of their contribution, rather than only half. Second, to prevent certain individuals from gaming the system I limit the amount a non-itemizer can take to the amount of the standard deduction.

My second bill, Mr. Chairman, the Charitable Contributions Growth Act, excludes from the itemized deduction "haircut" all qualified charitable contributions. Qualified medical expenses, certain investment interest expense, and deductions for casualty losses already receive this treatment. Certainly charitable contributions should be treated no worse.

Many taxpayers today contribute to charitable organizations out of the goodness of their hearts and in the expectation that they will not be subject to federal income tax on their gifts. However, in some cases taxpayers suffer a reduction in the amount of their charitable deductions. For example, under current law, itemizing taxpayers with incomes above a certain threshold ($128,950 this year for a married couple filing jointly) suffer a phase-down in the total amount of charitable contributions they can take. The phase-down is at the rate of 3 percent of their itemized deductions for every $1,000 over the threshold, up to a total in lost deductions of 80 percent. Thus, a taxpayer making a $10,000 contribution and subject to this phase-down could lose up to $8,000 in charitable deduction. This is part of the itemized deduction "haircut" administered as part of the 1986 Tax Reform Act.

As I said in my opening remarks, it is hard to imagine the individual who gives for the purpose of getting a tax deduction; most individuals give to charity because to do so is a blessing. Nevertheless, taxes can affect the amount an individual is willing to give. When an individual's tax burden increases, that person has less discretionary income and thus less income to give to charity. And when the effective price of charitable giving rises, which is the precise consequence of the phase-down in itemized deductions, there is a disincentive to give.

My third bill, Mr. Chairman, the IRA Charitable Rollover Incentive Act of 2001, would allow individuals age 59 ½ or older to contribute amounts currently held in Individual Retirement Accounts (IRAs) directly to qualified charities without having to first recognize the income for tax purposes and then take a charitable deduction. This legislation will give individuals more freedom to allocate their resources as they see fit while providing badly needed resources to churches, colleges and universities, and other social organizations. I introduced a similar bill in the 106^th Congress, which garnered 125 co-sponsors. The essence of this bill was included in the tax bill vetoed by President Clinton in 1999 and was included again in the pension reform bill that passed last year. I introduced this Bill, H.R. 774, on February 28^th, and it has been incorporated into H.R. 7.

All IRA withdrawals are generally taxed as ordinary income. Currently, individuals may withdraw funds from an IRA without incurring an early withdrawal penalty once they reach age 59 ½. Under so-called minimum distribution rules, an individual must begin making withdrawals by April 1^st following the year he or she reaches age 70 ½. The IRA was intended to encourage individuals to save for retirement, but due to the strong economy in recent years and the general increase in asset values, many individuals have more than sufficient funds to retire comfortably. Thus it is a common practice for retirees to transfer some of their wealth to charities and, in some cases, that wealth is held in an IRA.

If our tax code were not so laden with peculiarities and oddities, this legislation would not be needed. A taxpayer could readily recognize the income for tax purposes and take a charitable deduction. Unfortunately, in many cases under current law such a simple arrangement results in a loss of some portion of the charitable deduction.

Finally, Mr. Chairman, another proposal that I believe ought to be considered in this context would encourage additional charitable giving by those generous individuals who already contribute the deductible maximum. Under current law, individuals who contribute appreciated property (such as stocks and real estate) to charity are subject to complex deduction limits. While donors can generally deduct charitable contributions up to 50 percent of their income, deductions for gifts of appreciated property are limited to 30 percent of income. For gifts of appreciated property to charities that are private foundations, deductions are limited to 20 percent of income. These limits under present law discourage charitable giving from the very people who are in the best position to make large gifts. Someone who has done well in the stock market should be encouraged to share the benefits. In order to fix this problem we should consider allowing contributions of appreciated property to be deductible within the same percentage limits as for other charitable gifts.

Such a proposal would increase the percentage limitation applicable to charitable contributions of capital gain property to public by individuals from 30 percent of income to 50 percent of income. Thus, both cash and non-cash contributions to such entities would be subject to a 50 percent deductibility limit. In addition, I would propose increasing the percentage limitation for contributions of capital gain property to private foundations from 20 percent to 30 percent

It is impossible to know how much capital is trapped by the current rollover rules and thus unavailable to our nation's charities. According to one report, there is over $1 trillion held in IRA accounts. If only 1 percent of this would be donated to charity but for the tax problems associated with charitable rollovers, this represents a $10 billion loss of resources to these organizations that do so much good.

In closing, I would like to tell you how pleased I am to be offering these three bills, major portions of which have consistently received strong bi-partisan support. I hope we can finally see their enactment in 2001.

Thank you, Mr. Chairman.