An Experiment in Charitable Giving Incentives: Mich. Ends Tax Credit

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February 19, 2012; Source: Midland Daily News | In the debate over President Obama’s proposal to cap the charitable tax deduction for itemizers, there is great uncertainty about how much the cap will cost nonprofits, though much more certainty about how much it will generate in new revenues for the federal treasury. 

Michigan might be providing the nonprofit sector with a case study on what a change in the tax incentives for charitable giving actually does. Through the end of last year, Michigan residents who had a state tax bill to pay could make donations to specific categories of charities and receive a 50 percent state income tax credit. The state charitable tax credit was ended in October by the Michigan Business Tax bill, which aimed to provide tax advantages to small businesses.

Many Michigan charities fought to extend the charitable tax credits, but this article from the Midland Daily News quotes nonprofit leaders putting on a brave face. For example, the president and CEO of the Midland Area Community Foundation, Jan McGuire, said, “I don’t’ think that the end of that tax credit is going to change [donors’] opinion of what we do and their habits as contributors.” 

The true impact of the change, according to Kathy Wilbur, the vice president of Central Michigan University’s development and external relations office, won’t be known until a year from now. Next year at this time, we should be able to compare charitable contributions without the tax incentive compared to the level of contributions with it. The nonprofit sector would be foolish to miss the empirical research opportunity, though the research comes with at least three important caveats:

  1. The Michigan program was a tax credit, not a tax deduction. A tax deduction reduces one’s taxable income, while a tax credit comes straight off of the taxes one owes. In other words (that is, in federal tax terms), a tax deduction of $1 capped at the 28 percent tax level is really worth 28 cents, while a tax credit of $1 is worth $1 taken off actual taxes owed. A 50 percent credit means that for every one dollar of charitable donations, the taxpayer can take 50 cents off of taxes owed. As you can see, a credit is more attractive than a deduction. If ending the credit has relatively minimal effects in Michigan, it would suggest even more de minimis consequences for a cap on deductions.
  2. The Michigan program was restricted to donations to three broad categories of nonprofits: “public” institutions (such as public universities, public libraries, and public broadcasters), nonprofits whose primary purpose is the provision of shelter and food to the poor, and community foundations. Still, there is something that might be learned about the specific impact of losing the incentive, even if only for these limited categories.
  3. The Michigan incentive was capped. Individuals could donate up to $200 in each of the categories (a total of $600) for a $300 credit, while couples could give up to $400 in each category ($1,200 total) for a maximum credit of $600. Estates, trusts, and businesses could qualify for a credit of as much as $5,000 for a donation of $10,000, though indications are that the Michigan credit worked best for individuals and couples and only for closely held corporations on the business side. Nonetheless, it was a limited credit available to any taxpayer with a state tax liability, as opposed to being targeted to only the very wealthy, as President Obama’s proposal is.

For tax year 2010, state officials estimated that the tax credits had generated nearly $100 million in charitable contributions. These included 244,685 income tax returns with a credit of $21.9 million for donations to public institutions, 222,557 returns for donations to homeless shelters and food banks for a credit of $18 million, and 33,626 with contributions to community foundations for a credit of $3.1 million. What will the charitable experiment of the Michigan charitable tax credit teach the nation about charitable giving incentives? –Rick Cohen