November 12, 2019; NPR, “Planet Money”
A report issued earlier this month by US Senator Mike Lee (R-UT) advocates replacing the current charitable deduction with either an “above-the-line” charitable tax deduction or a charitable tax credit that applies equally to all taxpayers, reports Greg Rosalsky in NPR’s “Planet Money” newsletter. According to the report, either policy reform could be expected to increase US charitable contributions by over $20 billion a year. Readers will recall that NPQ took a policy position last year in September in support of a universal charitable deduction, and since that time the downward trend of giving households has continued apace.
Prompting the report in part is a decline in reported charitable giving numbers in the latest Giving USA report. As NPQ noted, the 2018 Giving USA report found that individual giving was $292.09 billion in 2018, which represented a decline of 1.1 percent (3.4 percent, adjusted for inflation) and followed years of consistent giving increases.
One possible driver of this shift is the doubling of the standard deduction in the 2017 tax bill, which dramatically reduced the number of taxpayers who itemize their deductions. Alex Brill and Derrick Choe of the American Enterprise Institute contend that donations in 2018 would have been $15.5 billion higher in 2018 if the tax law hadn’t changed. Of course, it is easy to read too much into one year’s numbers. Patrick Rooney of the Lilly School of Philanthropy has cautioned that “it may take two or three years to see the real impact of the tax bill.”
Less speculative are the tax law’s distributional consequences. IRS data that were reproduced in the report, which was written by Lee’s policy advisor, Robert Bellafiore, show that the charitable tax deduction cost the US treasury $54.1 billion in 2018, of which $30.5 billion or 56.4 percent, went to the top one percent of taxpayers.
This relates to another report theme, one that NPQ has highlighted, namely the long-term decline of the small giver. While the 2017 tax law is likely to exacerbate this tendency, the shift in donations away from small givers began many years before the 2017 tax law took effect. As Bellafiore writes, “while total giving has increased, the percent of Americans giving has decreased, from 66 percent in 2000 to 56 percent in 2014. In other words, growing donations are coming from a shrinking share of the population.” Bellafiore also notes that individual giving has becoming a declining share of total giving, falling from 83 percent of all giving in 1978 to 68 percent in 2018, with the share of foundation giving being the fastest rising source.
The report suggests that Congress adopt one of two potential reforms. One would make the charitable giving deduction “above the line,” meaning those who don’t itemize their taxes (and instead take the standard deduction) can still deduct their charitable contributions to reduce their tax bill. This is a policy proposal that NPQ endorsed last year. According to projections made by Brill and Choe, this policy change would cost the US government $25.8 billion a year and would raise $21.5 billion in donations.
The other reform the report offers would be to replace the charitable deduction with a charitable tax credit. Replacing the charitable deduction with a straight 25-percent credit, available to all taxpayers regardless of tax bracket, would reduce federal revenue by $31.1 billion and increase charitable giving by $23.3 billion, again according to projections by Brill and Choe.
Of course, giving patterns differ greatly depending on the income level of the giver. The report cites a study conducted by the Lilly School over a decade ago that found a majority of donations from households with incomes below $200,000 went to religious institutions, with “help meeting basic needs” in second position. By contrast, the same study found that arts, education, and health make up the majority of donations for those with incomes of $200,000 and above, with millionaire donors making 65.9 percent of total donations in these three categories.
It may be true that Senator Lee, in advocating altering the tax code to encourage more donations from low-income donors, hopes to encourage more donations to be made to religious groups. Regardless, using the tax code to reduce the dominance of megadonors in our sector would be a reform well worth considering.—Steve Dubb