Representatives of various charities and nonprofits presented a case for preserving charitable deductions in the Tax Code in a hearing before the House Ways and Means Committee, arguing that imposing a cap on such deductions would cause many of them to cut back services at a time of critical demand.

In light of declining federal and state funding and reductions in Medicaid spending, the role of charitable deductions has never been more important. Since the economic downturn in 2008, charitable giving has declined by $25 billion as Americans have struggled to navigate a difficult economy. Federal and state budget cuts have further overburdened and diminished the capacity of nonprofits and disproportionately affected those least able to help themselves.

Charities and Churches are worried about the cutbacks they are expecting from the budget sequester and believe that limitations in the charitable deduction would only exacerbate the problem. Given the inevitable government cuts to critical education and human service programs, Congress should be looking for ways to expand incentives for private charitable giving.

A report by Congress’s Joint Committee on Taxation noted the important role of the charitable deduction in encouraging donations. Many charitable organizations rely on charitable donations to finance their operations, and the charitable deductions deduction plays an important role in providing such support. The deduction for charitable contributions reduces the economic cost of making a donation and thus encourages charitable giving.

House Ways and Means ranking member Sander Levin, D-Mich., pointed out that the charitable deduction is not a “tax loophole,” and is widely used by millions of taxpayers, just like the deduction for mortgage interest.

The charitable deduction is among the 10 largest tax expenditures in the code, benefiting almost 1.1 million charities and more than 37 million Americans who contribute to Section 501(c)(3) organizations every year. In 2010, it is estimated that individuals donated $210 billion to charitable organizations, of which they claimed $170 billion on their tax returns.

There are already charitable deductions limitations in place for the wealthiest Americans, including the Pease provision that was reinstated as part of the fiscal cliff deal legislation.

On Wednesday, the House Ways and Means Committee set up working groups to deal with various aspects of tax reform, including the charitable deduction. Congressman Jim Renacci, R-Ohio, a Accountant, joined the committee Thursday, adding needed accounting expertise to a committee charged with writing tax laws.

Section 170 of the Tax Code provides a deduction to the roughly one-third of taxpayers who itemize their deductions for charitable contributions. Taxpayers may contribute on a deductible basis to institutions such as churches, universities, hospitals, museums, and certain other tax-exempt organizations. Certain limits apply to the deduction, such as percentage-of-income limits and purposes for which contributions may be made, and the recently reinstated overall limitation on itemized deductions for taxpayers above certain income thresholds.

Proposals to limit the deduction for charitable contributions have appeared in recent years, in some cases as part of broader tax reform proposals that lower rates and in other cases for the purpose of raising taxes to fund specified levels of government spending, the Ways and Means Committee noted.

Examples of some of these restrictions include: limiting the tax rate against which contributions may be deducted; a dollar cap on total itemized deductions; a floor below which contributions may not be deducted; and the replacement of the deduction with a tax credit available regardless of whether the taxpayer itemizes. Different types of limitations could have varying effects on giving.

“We want to ensure that whichever policies we ultimately decide to pursue are crafted in a way that makes the Tax Code simpler, fairer and easier to comply with,” said Ways and Means Committee chairman Dave Camp, R-Mich. “In the case of the charitable community, we also want to make sure tax reform allows you to continue to meet and fulfill the mission of each of your organizations. Our nation’s public charities and private foundations perform invaluable services for our society—at home, nationally and, in some cases, across the globe. This is especially true during times of economic slowdown and high unemployment—challenges we have struggled with mightily over the past years. These are also the same organizations that step up and respond to individual moments of crisis—hurricanes, floods, earthquakes, fires, acts of terrorism and community-specific tragedies too. It is in those moments that these organizations come face-to-face with humanity and the generosity of men and women who answer the call for help.”

One group that argued for limiting the for-profit activities of charities was the Business Coalition on Fair Competition. “Billions of dollars in economic activity occurs each year that is untaxed,” said BCFC president John Palatiello. “This results in lost revenue to federal, as well as state and local, government agencies. And it creates an unlevel playing field for the private sector, particularly small business. Nonprofits enjoy a whole host of advantages—chief among them being tax-free status. … That gives them an unfair advantage in the marketplace.”