The potential impact of tax reform proposals by the Congressional House Ways and Means Committee and the Trump Administration has generated two camps of thought regarding charitable giving. One camp believes that although the charitable deduction, which both proposals retain, encourages charitable giving, other tax proposals intended to stimulate economic growth may actually discourage it. The other camp believes that well-implemented comprehensive tax reform designed to spur economic growth, creates bigger pockets and thus incentivizes donations.
Considering both perspectives, let’s take a closer look at tax reform proposals as they impact charitable giving and check the pulse on overall sentiment of tax policy’s impact on charitable giving.
GLANCING BEHIND BEFORE LOOKING AHEAD
Exactly 100 years ago, in 1917, the first charitable deduction was introduced as part of the tax code, giving recognition to the notion that tax policy impacts charitable giving. Since then, the deduction has been revisited, adjusted and limited as policymakers have aimed to maximize private donations, while minimizing the reduction of taxpayer revenue to the Treasury. As Brian Gallagher, President and CEO of United Way Worldwide asserts, “Americans will never stop giving, but we know that tax incentives are important to how much they give.”
MOBILIZING IN THE PUBLIC ADVOCACY SPACE
Lobbying and other nonprofit advocacy groups are taking action to address mounting concerns that tax reform proposals will discourage charitable donations. They are analyzing the reform, presenting insights to policymakers and charitable organizations and recommending alternative tax proposals to incentivize charitable giving.
Three key aspects of the Trump Administration and Congressional House Ways and Means Committee tax reform plans give this camp pause:
- A decrease in the number of other itemized deductions allowed, including the elimination of the state and local tax deduction
- An increase to the standard deduction—$11,000 for individuals and $22,000 for married couples
- A decrease in the number of tax brackets and the top marginal tax rate
Since taxpayers only claim itemized deductions if the total of those deductions exceed the standard deduction, it would dramatically reduce the number of people who benefit from itemized deductions—charitable deductions in particular. Many more people will just take the standard deduction, which provides less incentive to give to charity. The decrease in the top marginal tax rate to 35% and the reduction in the number of tax brackets planned also lessen the tax dollars that a donor will save. This would increase the after-tax price of giving, for wealthy individuals and philanthropists especially, and provide less incentive to give to charity.
To highlight the possible outcomes of these reforms on charitable giving, Independent Sector, an organization dedicated to advocating for public policies that impact the charitable sector, commissioned a study by the Indiana University Lilly Family School of Philanthropy. The study concludes that current tax reform proposals could decrease charitable giving by billions. The study quantifies the effects of tax policy changes and outlines key aspects of certain taxpayer behavioral patterns to draw their conclusion.
High income taxpayers are much more likely to itemize and itemizers are far more likely to donate. In deciding how much to donate, these taxpayers tend to look at the after-tax price of giving and will respond to tax policy changes by substituting charitable donations between years if it might result in a lower after-tax price of giving, or higher tax benefit for their donation.
Key data points and tax proposal alternatives presented by the study include the following:
- Increasing the standard deduction and decreasing the top marginal tax rate would lower charitable giving between $4.9 billion and $13.1 billion, or between 1.7% and 4.6%
- Expanding the charitable deduction to non-itemizers as a stand-alone provision would increase giving between 1.3% and 4.3%, with a negligible effect on total tax revenue (.41% to .47%)
- Combined with the tax reform proposals (increase in standard deduction and decrease in top marginal tax rate), expanding the charitable deduction to non-itemizers more than offsets the charitable giving lost by the other tax reform proposals and increases giving between $1.1 billion and $4.8 billion, or between .4% and 1.7%
It should be noted that the ranges are to give effect to the responsiveness (low to moderate to high) of charitable giving to changes in tax policy (known as tax-price elasticity). Historically this responsiveness has been high, so it is not outside the realm of possibility that the higher limits cited could be reached.
Given the positive findings in the third bullet point above, Leadership 18, a group including the nation’s big name charities, has joined forces with Independent Sector and their partners to take action. They are engaging members of Congress and the Trump Administration to make the case for expanding the charitable deduction to non-itemizers. This alternative is reminiscent of the period from 1982 to 1986, when these deductions were available to all taxpayers, whether or not they itemized their deductions.
AN ALTRUISTIC OUTLOOK IN A POTENTIAL GROWTH ECONOMY
The other camp views the tax reform proposals more optimistically and believes it could have an overall positive impact on charitable giving. The basis for this camp of thought is that well-designed and executed tax reform should lead to a thriving economy. When the economy is doing well, people are more inclined to give. To Adam Michel, policy analyst at The Heritage Foundation, a conservative think tank, “If tax reform is done properly, there’s growth that happens as a result” and “when the economy is doing well, and people have more money in their pockets, they donate more.”
Is there a reason for concern or will a robust economy spurred on by successfully implemented tax reform erase these concerns? For a deeper dive on tax reform, download Friedman LLP’s exclusive report, “Tax Reform in the Trump Era” here: http://www.friedmanllp.com/2017TaxReformWhitePaper