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Should colleges worry about plans to cap deductions?

A cap on tax deductions for charitable contributions, which lawmakers are considering as they negotiate an end to the ‘fiscal cliff,’ could curb campus fundraising, observers fear

The charitable deduction, which dates to 1917, would cost the government about $250 billion over the next five years, and proposals for reform vary.

The scenic campus of Colgate University in upstate New York is enjoying more than a fresh coat of paint these days.

New buildings include the Robert H.N. Ho Science Center and the Trudy Fitness Center. The Case Library was refurbished and renamed, and includes the new Geyer Center for Information Technology. There’s also $142 million in the coffers for financial aid—all the fruits of a recent $480 million fundraising campaign.

Colgate cast a wide net. But like most big campus fundraising campaigns, the lion’s share came from wealthy benefactors rewarded in return with a combination of altruistic satisfaction, naming rights—and a big tax deduction.

Now, that tax deduction might be in jeopardy, and some in higher education are worried.

Democrats want more tax revenue, and Republicans are fighting increases in tax rates. That means capping deductions for such things as mortgage interest and possibly charitable contributions could become part of any compromise.

Such an outcome would shed light on a question economists have longed debated: How big a factor is that tax deduction in the decision to give to charity in general, and more specifically, in the globally unrivalled fundraising success of American colleges—which collected $30 billion in donations last year?

Colleges have reason for concern. Compared to charities such as religious or social service organizations, education gets a hugely disproportionate share of contributions from the well-off. It’s wealthier taxpayers who itemize and benefit most from deductions—the higher your marginal tax rate, the bigger the “discount” you get on your taxes for giving to charity. So, incentives for the wealthy to donate less could affect campus fundraising in particular.

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