As Congress wrangles with plans to avoid the fiscal cliff, the tax deduction for charity donations is getting the tightest scrutiny of its nearly 100-year history. 

Alarmed Minnesota nonprofit leaders are in Washington this week, lobbying to preserve the deduction that supports one of the most vibrant nonprofit sectors in the nation.

"About 860,000 [Minnesotans] reported making charitable donations on their taxes in 2010," said Jon Pratt, executive director of the Minnesota Council of Nonprofits, who was among those in Washington Tuesday for "Protect Giving" day on Capitol Hill.

"People donate because they are generous, but the amount is determined by tax policy."

Deductions for charitable contributions totaled more than $38 billion in 2010, including $3 billion in Minnesota. While proposals to limit the tax break have been made before, including in President Obama's budget proposals, the basic line-item deduction has burst into the national spotlight in the current federal deficit talks.

It has become a hot topic in the media, blogosphere and on social networking sites. It has sparked urgent pleas by nonprofits and foundations, asking their supporters to contact Congress. Nonprofit coalitions have forged alliances. Think tanks are cranking out research about an area of taxation that had attracted relatively little attention before.

"This could be the largest debate we've ever had over charitable deductions," said Eugene Steuerle, a veteran tax policy expert at the Urban Institute, a Washington-based research group that is scrutinizing the proposals.

"But it's not clear where the debate will go," he added, "because it's a subset of a much larger debate about the budget and tax policy in general."

The issue is being watched closely in Minnesota, home to more than 5,000 nonprofits, including hospitals, schools, museums and a myriad of health and social service agencies.

"We have such a large nonprofit sector, and such a rich history of individuals willing to support them, that a loss in the deduction would weaken the quality of life here," said Frank Forsberg, a vice president at Greater Twin Cities United Way, who is part of the Protect Giving crowd in Washington.

$50 billion at stake

Few people argue that the charitable deduction should be scrapped. The problem is, it diverts about $50 billion a year from the tax rolls, according to the Urban Institute.

It is being eyeballed for cuts along with the mortgage deduction and the state/local income tax deduction. But it's the smallest of the lot. Minnesota taxpayers deducted $3 billion for charity donations in 2010, compared to $8.3 billion for mortgage interest and $9.3 billion for state and local taxes, according to the Minnesota Department of Revenue.

Obama would cap charity deductions for people in the highest income-tax bracket at 28 percent, down from 35 percent today. That would affect individuals with incomes of about $200,000 and couples with incomes of $250,000.

Someone in that tax bracket who donates $1,000 to a hospital, for example, would get a $350 tax break today. Under Obama's plan, the person would get a $280 break.

Former GOP presidential candidate Mitt Romney had proposed putting one cap on all deductions combined, mentioning a $25,000 limit. A proposal by Sen. Bob Corker, R-Tenn., last month offered a $50,000 cap.

However, the wealthiest Americans could pay $40,000 -- or more -- in local and state taxes alone. That would leave little if any room for deductions for charity, said Chuck Marr, director of federal tax policy at the Center on Budget and Policy Priorities in Washington.

Another idea being floated is creating a "floor" on charitable donations, or a minimum donation amount in order to claim the deduction.

Congressional Republicans have not gelled around a specific proposal yet, Marr said.

"I think there are two different possibilities," said Steuerle. "One is that it [the deduction] gets folded into an attempt to cut deductions in general. The second scenario is that it gets exempted."

But even if charities get exempt this time around, the issue won't go away. Said Steuerle: "This budget crunch we're in will last a decade. It will put pressure on all our programs."

Warning supporters

Leaders of Minnesotan charities are pondering how to keep their budgets afloat while facing this new threat.

Joe Selvaggio, a seasoned fundraiser among Minnesota millionaires, plans to e-mail his wealthiest donors to encourage them to give more this year in case the deduction is reduced "or isn't around."

"People are worried about this," said Selvaggio, founder of the Minneapolis-based MicroGrants. "Even people who don't mind paying taxes, they hire hard-driving attorneys to save them every dime. So the tax deduction is important."

The deduction is particularly important for the rich, who benefit disproportionately. The roughly 50,000 Minnesota households with adjusted gross incomes of more than $250,000 claimed 28 percent of the state's charitable deductions in 2010, according to the state Revenue Department. That amounted to $900,000.

Meanwhile Minnesota's largest nonprofits, such as Catholic Charities of St. Paul and Minneapolis, worry about any changes in the deduction formula -- for the rich or middle class.

"We're in a growth industry," said CEO Tim Marx, referring to the boom in demand for emergency housing, food and family services. "And now you're reducing funding on the public side [the government] and the private side."

One of those leading the charge on Capitol Hill is the Rev. Larry Snyder, the former head of Catholic Charities in the Twin Cities who now is president of Catholic Charities USA. He heads a coalition of 18 of the nation's largest nonprofits, which is fighting attempts to tap charity donations to pay for the budget deficit.

"Catholic Charities [across the country] gets about $1 billion worth of philanthropic support," said Snyder, one of the keynote speakers Tuesday. "I don't know where people think we will make this up. Yes, we get funds from the government. But it doesn't fund full fare."

Jean Hopfensperger • 612-673-4511