WASHINGTON - The White House and the nation's most prominent charities are embroiled in a tense, behind-the-scenes debate over President Obama's push to scale back the nearly century-old tax deduction on donations that the charities say is crucial for their financial health.
In a series of recent meetings and calls, top White House aides have pressed nonprofit groups to line up behind the president's plan for reducing the federal deficit and averting the year-end fiscal cliff, according to people familiar with the talks.
In part, the White House is seeking to win the support of nonprofit groups for Obama's central demand that income tax rates rise for upper-end taxpayers. There are early signs that several charities, whose boards often include the wealthy, are willing to endorse this change.
But the White House is also looking to limit the charitable deduction for high-income earners, and that has prompted frustration and resistance, with leaders of major nonprofit organizations, such as the United Way, the American Red Cross and Lutheran Services of America, closing ranks in opposing any change to the deduction.
"It's all castor oil," said Diana Aviv, president of Independent Sector, an umbrella group representing many nonprofits. "And the members of the nonprofit sector I represent don't want any part of it. It's a medicine we're not willing to drink."
Eileen R. Heisman, president and chief executive of the National Philanthropic Trust in Jenkintown, which manages more than $2.8 billion in charitable assets, said that limiting the tax deduction for charitable donations could have a severe impact. The charitable deduction "was passed in 1917 and hasn't been touched since," she said. "To have it on the table to help balance the budget is unfortunate and not wise."
Heisman warned that it would be hard to reverse if Congress enacted such a change. "I just don't think they should balance the budget on the backs of charities," Heisman said.
The dispute is the latest in a long-standing struggle over the popular tax provision, which allows people to deduct charitable donations from their taxable income. The battle is playing out at the highest levels of government and in the corridors of K Street.
Since Obama first proposed to lower the deduction in 2009, more than 60 nonprofit groups have spent at least $21 million lobbying Congress and the White House to preserve it, lobbying records show. Although nonprofit officials characterize the effort as grass roots, including a recent "Lobby Day" during which the groups' staffers donated their time and descended on Capitol Hill, at least 25 organizations have also hired Washington area lobbying firms.
Obama has proposed capping the value of deductions for individuals earning more than $200,000 ($250,000 for families) at 28 percent, regardless of their tax bracket. This would include deductions for mortgage interest and state and local taxes, along with charitable contributions.
Currently, the tax code allows people who itemize deductions to deduct their charitable contributions at their maximum marginal tax rate. So, for example, if someone in the highest tax bracket - now a 35 percent tax rate - gives $100 to charity, the donor saves $35 in taxes. If the deduction were capped at 28 percent, the donor would save only $28.
Capping deductions at 28 percent - including those for charitable contributions, mortgage interest, and state and local taxes - would raise $574 billion in new federal tax revenue over 10 years, according to White House estimates. The White House did not detail how much revenue would be produced by lowering the charitable deduction.
Obama has dismissed the charities' contention that his plan would substantially damage their fund-raising.
Obama aides this week also signaled a willingness to overhaul corporate taxes as an enticement for the chief executives of major U.S. companies to speak out in favor of raising individual income taxes, and a number of prominent executives have begun backing the tax plan in recent days.
The efforts to press charities have been bumpy. Though many nonprofit leaders agree with Obama's view on top-end tax rates, they have been disappointed that the president seems unwilling to drop his plan for limiting the charitable deduction.
The frustration stems in part from what some nonprofit leaders describe as a philosophical disagreement between Obama and the nonprofit sector. The president has framed the tax deduction as a benefit for the wealthy, they say, while in their view the deduction is a benefit for charities that use the money to help the needy.
White House officials have warned that Republicans would "eliminate" the charitable deduction altogether by placing caps on total deductions and rejecting higher tax rates, which represent an alternative source of revenue. Obama made this argument during an interview on Bloomberg Television, painting the GOP as the party that would hurt charities.
Aides to House Speaker John A. Boehner (R., Ohio) dispute the White House's characterization. They say House GOP leaders have signaled their desire to negotiate with Obama on all deductions, including the one on charitable giving.