May 31, 2011

Study Shows How Changes to the Tax Code Could Affect Giving

A new Congressional Budget Office study is looking into how changes in the way donors calculate their tax deductions for charitable donations would affect giving—and the federal budget.

The study examines options such as offering deductions to those who don't itemize their tax returns, converting tax deductions for gifts into tax credits, and offering tax breaks only to people who donate a minimum amount of money.

It found, for example, that if all taxpayers had been allowed to claim deductions for charitable contributions in 2006, rather than just those who itemized their expenses, charities would have received $2-billion more in gifts. The government, meanwhile, would have lost $5.2-billion in tax income associated with the deductions. (Individuals donated $203-billion to charity in 2006, the report says.)

At the other extreme, charities would have received $10-billion less in donations in 2006 if taxpayers had been eligible only for a 15-percent tax credit for their charitable donations but only for amounts donated beyond 2 percent of their adjusted gross income. Conversely, the Treasury would have been $24.6-billion richer under such a change.

The study—which was requested by John Spratt Jr., the Democratic former chairman of the House Budget Committee, who is no longer in Congress—does not analyze President Obama's proposal to limit the value of the charitable deduction for wealthy people.

The CBO analyzed data from 2006 federal income-tax returns as well as information from the U.S. Census Bureau, Federal Reserve Board, and Bureau of Labor Statistics.

The researchers noted that it was difficult to calculate precise estimates because evidence about the influence of tax incentives on giving is inconclusive.

The study examined the impact of keeping the current deduction but making it available only to people who had donated a minimum amount, such as $500 ($1,000 for families) or 2 percent of their adjusted gross income. It also looked at extending the current deduction to people who do not itemize, turning it into a 25-percent tax credit, or turning it into a 15-percent tax credit—all of those both with and without minimum donation amounts.

The chairmen of President Obama's deficit commission proposed an idea in December that is similar to one of the options analyzed by the CBO. They suggested converting the charitable deduction to a 12-percent tax credit for amounts taxpayers donated beyond 2 percent of their adjusted gross income. However, they tied it to other changes in the tax code, such as reducing the number of tax brackets from six to three and bringing the top rate down from 35 percent to 28 percent.