Proposed changes to the tax code circulating on Capitol Hill would suppress charitable giving by 4.6 percent, or $13.1 billion, according to an analysis released Thursday.
Conducted by the Indiana University Lilly Family School of Philanthropy and commissioned by Independent Sector, a nonprofit lobbying group fighting to keep the charitable deduction intact, the study comes as a key House committee prepares to delve into a comprehensive tax overhaul.
The groundwork is being laid now, said Dan Cardinali, president of Independent Sector, adding that he expects legislation to be near completion in the fall.
While the major tax proposals under consideration in Congress keep the charitable deduction, Mr. Cardinali warned that other changes, such as reductions in marginal rates or changes to the standard deduction, could negatively affect charitable giving.
“When you start moving these pieces around, there are serious unintended consequences that need to be accounted for,” he said. “It’s a Rubik’s Cube.”
In preparation for a rewrite of the country’s tax code, the White House last month released a one-page policy outline. House Republicans, led by Ways and Means chairman Kevin Brady, produced a tax blueprint last June. Each proposal would reduce charitable giving by households — which are expected to contribute $284 billion this year — by about 4.6 percent, the study found. The analysis published Tuesday also found that allowing all taxpayers to claim a charitable deduction even if they don’t itemize their tax returns — a policy championed by Independent Sector and others representing nonprofits — would result in a $4.8 billion increase in charitable giving.
Though the House GOP plan might reduce charitable gifts, nothing is written in stone. Speaking at a Bloomberg BNA lunch shortly after the election, Mr. Brady seemed open to continuing to use the tax code to provide an incentive for charitable gifts. The tax panel, he said, was “looking to see if there’s a way to unlock more charitable giving.”
Fewer Could Itemize
To estimate how those two proposals would affect charitable giving, researchers used as a model tax legislation proposed in 2014 by then House Ways and Means Committee Chairman Dave Camp (R-Mich.).
The Camp proposal differs from the current House plan and the direction offered by the White House. But aspects of it are similar enough to estimate how the policies now under consideration would change charitable giving, according to Independent Sector. For instance, all three proposals would nearly double the standard deduction, and each plan would reduce the number of tax brackets and lower income-tax rates.
Many nonprofit groups say the write-off is a key incentive for making gifts to nonprofits.
But currently only about 30 percent of taxpayers, concentrated in higher-income brackets, itemize their tax returns. If the standard deduction were doubled, Independent Sector and other nonprofit advocacy groups maintain, the incentive to give would be significantly reduced. The House plan envisions that about 5 percent of taxpayers would itemize with the higher standard deduction.
Investing in the Community
The study provides ammunition for a key Independent Sector priority: allowing all taxpayers to claim deductions for charitable gifts even if they don’t itemize them separately. Doing so would place charitable gifts “above the line” on tax returns, allowing taxpayers to deduct charitable gifts from gross income in the same place as other nonitemized deductions, such as tuition expenses and retirement-account contributions.
As the tax debate heats up, policy makers will hunt for all the revenue they can. Nonprofit leaders are hoping to protect policies designed to spur charitable gifts.
“The charitable deduction is unique because it’s not actually a direct benefit to the tax payer,” said Allison Grayson, director of policy development and analysis at Independent Sector. “This is an investment into the community. We want to make sure we aren’t seen as the same as every other tax incentive.”
To calculate their findings, the Lilly School researchers used the school’s Philanthropy Panel Study, which tracks the charitable habits of the same families over time, and the Panel Study of Income Dynamics, a long-running study of income data from 9,000 households.
Note: This story has been updated to include a comment by House Ways and Means Chairman Kevin Brady about the charitable deduction.
