There’s a lot for nonprofit organizations to like in Joe Biden’s tax proposals to help the neediest, but the net effect on charitable giving by the wealthy has the potential to deter some donors.
If Biden wins the presidential election next week, nonprofits and foundations will largely rally around his proposals to help low-income Americans, including expanding the earned-income tax credit, which reduces taxes for low-income working people, and the child and dependent-care tax credit, which offsets the cost of child care.
Biden is reviving a proposal — floated but never enacted during the Obama administration — to limit the value of itemized deductions for those making $400,000 or more to 28 percent of the value of the gift. Currently that deduction, which includes charitable gifts, is worth 37 percent to high-income Americans — and it would be worth 39.6 percent if Biden wins the election and is successful in his plan to restore higher tax rates on wealthy Americans.
These high-income donors currently can write off $37,000 of a $100,000 gift, but the Biden plan would limit the write-off to just $28,000.
Arthur Brooks, a professor at Harvard University and former president of the American Enterprise Institute, says that limiting the deduction would be a disaster for universities, arts institutions, and other charities that rely heavily on big gifts from the wealthiest Americans. Research that Brooks conducted about the proposed change during the Obama administration found that the cap on deductions would drive down total giving by 4.4. percent.
“Every nonprofit that gets resources from the top 1 percent of donors should be extremely concerned,” Brooks says.
Biden’s plan to impose a 12.4 percent Social Security tax on income earned above $400,000 would also hurt giving, says Patrick Rooney, an economist at Indiana University’s Lilly Family School of Philanthropy. That tax can’t be reduced through giving, he says.
Investment Gains
However, some economists argue that additional aspects of the Biden plan might increase donations.
Biden’s proposals on capital gains would likely encourage very wealthy Americans to give more, says Eugene Steuerle, an economist at the Urban Institute. Under Biden’s plan, Americans earning more than $1 million a year would pay nearly twice as much tax on long-term capital gains and dividends as they currently do. Many of these taxpayers would be able to dodge some or all of the increase by making charitable gifts to offset the capital gains and dividends.
Biden would end a law that allows heirs to inherit assets at fair market value and avoid paying tax on gains that may have accrued for decades.
“That could spur more giving during a person’s lifetime,” Steuerle says. “Right now, if you hold assets until death, your capital gains go away. If those gains are instead going to be taxed, people will probably do much more lifetime planning, more recognition of income, and more charitable giving.”
Extending Deductions to All
Biden might work quickly work with Congress to revamp the 2017 tax cuts, which are scheduled to expire after 2025, Steuerle says. That process might lead to a greater number of people itemizing taxes — which would likely spur giving because the 2017 law increased the standard deduction and drastically reduced the share of Americans who itemize.
The legislative push from Biden could also be an opportunity for nonprofits to continue to press Congress to make permanent an idea that was passed in the wake of the pandemic: Give everybody access to a charitable deduction. The Cares Act, passed in March, allows individuals who don’t itemize to deduct up to $300 in charitable donations from their taxes. Charities hope to expand that to a larger sum as they ask Congress to take steps to ensure it lasts beyond the end of 2020.
Rooney believes the total impact — if all of Biden’s tax plans were enacted — would probably stimulate additional giving.
“Net-net, my hunch is that this would have a positive effect on philanthropy,” he says.
Aaron Dorfman, president of the National Committee for Responsive Philanthropy, says that even if Biden’s plan mildly reduced giving, that’s not sufficient reason for charities to oppose it.
“Too often the analyses of what proposed tax policies will do for the nonprofit sector don’t take into account the substantial role that government plays in meeting the needs of society,” Dorfman says. “We need to think holistically about any tax policy that get proposed — not simply judge it based on whether will it increase or decrease revenue to nonprofits.”
