By Nathan Diament and Maury Litwack
In seeking to raise revenue for the state’s treasury in his 2013 executive budget, Maryland Gov. Martin O’Malley has proposed limiting the tax deductions a person can take on his Maryland state taxes – including the deduction for contributions to charities. This aspect of the governor’s proposal will harm Maryland’s charities and the state’s broader economy in an already difficult time.
Under Gov. O’Malley’s proposal, Maryland citizens earning more than $100,000 per year will have their tax deduction for a charitable contribution reduced by 10 percent; Marylanders earning more than $200,000 per year will have that deduction cut by 20 percent. In making this proposal, Gov. O’Malley is following in the footsteps of President Obama who, for the past three years, has also proposed reducing the rate of tax deductibility for upper-income people’s charitable donations. In doing so the president, and now the governor, asserts that the reduction will not harm charities and that the policy change is a matter of “fairness.” Both these rationales are wrong, which is why President Obama’s proposal has been annually rejected by Congress and Governor O’Malley’s should be rejected in Annapolis.
Charities throughout the country, and in Maryland, have suffered greatly for the past several years as the deep recession has driven down donations and increased the demand for services, especially those in the social welfare sector. The governor’s change would depress donations further, worsening the situation.
Consider: a high-income Marylander pays a state tax rate of 5.25 percent and thus lowers his state tax bill by 5.5 cents for every dollar he contributes to charity. While that might not seem to add up to much for single small donations, the impact on large donations – which are what Maryland’s charities need in these tough times – will be significant.
The eminent economist Martin Feldstein has noted that “a substantial body of research shows that, on average, each 10 percent reduction in the cost of giving raises the amount a person gives by about 10 percent.” So, while the current rule spurs an additional 5.5 percent of contributions to Maryland’s charities, Governor O’Malley’s proposal would reverse this important incentive.
The governor’s proposal will also deliver collateral damage to Maryland’s broader economy. According to data from 2008, Maryland’s nonprofits (including every size and type from hospitals to universities to synagogues to soup kitchens) accounted for 10 percent of the state’s employed workforce and $11 billion in wages. With unemployment still a concern at 6.8 percent, this hit on such an important employment sector could dampen the state’s fragile recovery.
Maryland’s charities are a vital component of life in this great state. The Maryland Jewish community takes pride in the range of services and opportunities offered by our nonprofits. Social services, programming and synagogue life would suffer if charitable incentives were decreased. Jewish schools, with their parents already struggling with their affordability (a topic that has occupied space in this paper), would face even greater hurdles on this front.
The rationale that reducing the rate of deductibility for high income earners’ charitable donations is required to achieve “fairness” in tax policy fails, too. It is true, of course, that if a person earning $50,000 and another earning $150,000 each give $1,000 to charity, the wealthier donor will receive a larger deduction for that donation because his or her tax rate is higher. But if the policy outcome the governor seeks is to level that differential, the way to achieve fairness and not harm charities is to raise the rate of deduction received by the middle-income donor. That would be fair, and a tremendous catalyst for contributions.
Governor O’Malley’s proposal, while surely motivated by the commendable purpose of balancing the state’s budget, would harm Maryland’s charities and the myriad of needs they serve. The governor must recognize this and not wait for his proposal to be rejected in Annapolis. He should withdraw it from consideration.