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The implementation of the Tax Cut and Jobs Act in 2017 cost charities $20 billion in donations in 2018, the year it went into effect, according to a new working paper from the National Bureau of Economic Research, a think tank in Cambridge, Mass. While the research only looks at 2018, it projects $16 billion of that charitable giving loss was permanent and did not return in subsequent years.
The report doesn’t surprise observers who worried the changes in tax laws would reduce charitable giving. “This report, unfortunately tracks with every piece of data that we’ve seen about the impact of the 2017 tax bill, both before it was signed into law and in annual giving data since,” said Ben Kershaw, director of public policy and government relations, at Independent Sector.
The report used data from the Philanthropy Panel Study, which is longitudinal data that has been collected since 2001 and follows the same families — and their offspring as they age into independent households — over time to see changes. Mark Ottoni-Wilhelm, one of the paper’s authors, said the nature of the panel allowed researchers to see how families’ giving and tax filing status looked before and after the TCJA went into effect.
“We’re able to tell what happened to giving when a family used to itemize in 2016 but switched to not itemizing in 2018,” he said.
How the TCJA Impacted Giving
The TCJA did not change any laws related to charitable giving. However, it nearly doubled the standard deduction, enticing many who used to itemize their taxes to instead take the standard deduction. That meant the cost of giving rose for people who no longer itemized.
“If you were at the 25 percent marginal tax rate, you get $0.25 of that [donation] back; it only cost you $0.75 to give $1 to charity,” Ottoni-Wilhelm said. “But if you stopped itemizing, the price to give a dollar to charity for you would go up.”
People who stopped itemizing reduced what they gave to charity, according to the researchers. Ottoni-Wilhelm said that giving isn’t exactly the same as making a purchase, but it still follows the same basic economic principles that if the cost goes up, people will do less of it. In economics, he explains, how much people stop doing something based on its price going up is called elasticity.
“If the price went up 10 percent, did I give 10 percent less?” he says. “And if I did, that’s called an elasticity of one.”
People in the study who were, as Ottoni-Wilhelm describes, “really strongly affected by this policy” had an elasticity of two. “That number is pretty big,” he said. “If they experienced a 10 percent increase in the price, their giving went down 20 percent.”
That’s bad news for charities, which the report says lost out on $20 billion in gifts in 2018. However, the report says in anticipation of the law change, donors shifted about $4 billion of that charitable giving to the 2017 tax year so they could still get the benefit of the tax breaks. Ottoni-Wilhelm said the researchers expect $16 billion of those losses to be permanent because the law is still in place, although they have not done the comparison for subsequent years. He compares the law’s impact to that of a price change at a popular coffee chain. If the price goes up from $5 to $20, people will cut back.
“In the first week, people are going to buy less coffee, right?” he said. “Let’s say we don’t measure it in the second week, but we know the price is still $20. Do we think people are just going to shrug it off and say, ‘Okay, I’m going back now to buy’? ”
Because the law hasn’t changed, he says, “we don’t expect the behavior to change. The families that have switched off of itemizing toward the standard deduction are still doing that.”
Given all the talk of the loss of everyday donors and the declining donor count, nonprofits may wonder if the change in tax law also exacerbated the decline in donors. Ottoni-Wilhelm says the data suggests the law is not causing current donors to drop out of giving.
“The families that were affected by the policy did not take their giving to zero,” he said. “They’re still donors. The participation rate was not affected among these families, but the amounts were.”
The report is a working paper, and Jack Salmon, director of policy research at the Philanthropy Roundtable, says the report’s conclusions are flawed.
“It only actually captures one year post tax changes,” Salmon says. “So we’re really only seeing a snapshot in time rather than long-term trends. The second issue with the study is it only looks at a very tiny subset of itemizing taxpayers, rather than all taxpayers or all donors who give to charity. The changes we’re seeing don’t fully incorporate the broader charitable subsector.”
Salmon says Giving USA data showed an increase in dollars given in 2018, as well as in 2020 and 2021, and he says that argues against the TCJA negatively impacting charitable giving.
Unified Call for Charitable Tax Carve Out
The TCJA expires next year, and the tax code will revert to what it was in 2017, if Congress does nothing. Most observers believe Congress will try to implement some changes, and many in the nonprofit sector are pushing for a charitable deduction or credit in the tax code that encourages people to give regardless of whether they itemize or take the standard deduction.
C. Eugene Steuerle, a fellow at the Urban Institute, said the tax code is an important way to signal behavior for people, so he thinks it would be helpful for any tax code reform to include signals that encourage charitable giving.
“I think that restoring a more universal deduction would be a good idea,” Steuerle said. “This evidence says that if we did that, we probably would get more charitable giving.”
Ottoni-Wilhelm hopes lawmakers consider the report’s findings as they work through what to do with the expiring act next year. He says a policy solution would be to “detach the tax incentive from itemization.”
While Salmon at the Philanthropy Roundtable disagrees with the report’s conclusions and thinks lawmakers should disregard it, he and Ottoni-Wilhelm are on the same page about detaching itemization from charitable tax incentives.
“We don’t think only taxpayers who itemize should be able to give tax free,” he says. “We think you should be able to give tax-free dollars regardless of whether you like to itemize or not.”
