When Congress passed the Trump administration’s sweeping tax legislation in 2017, many supporters of the law believed its provision limiting deductions for state and local taxes would indirectly encourage charitable giving by wealthier taxpayers.
The thought was this: Affluent taxpayers in typically Democratic large states with the highest donations, like New York and California, faced a new $10,000 limit on the state and local tax deduction. Since these taxes can exceed $100,000 for some households, the new cap meant they would pay higher taxes. But charitable donations could help cushion that blow. Indeed, the deduction for charitable donations remained effectively uncapped, meaning that wealthy households could reduce their tax burden by donating more to charities and thereby offset the new deduction cap on their state and local taxes. .
Unfortunately, things didn’t work out that way. New research I conducted for the American Enterprise Institute, released today, shows that since the 2017 law was passed, charitable giving has declined in high-income counties with local taxes and d ‘state high.
All of the counties that saw fewer donations were in the top 5% of household income, and all of them were in blue states that typically have high state and local taxes and where the cap on deductions for those taxes has been the hardest hit.
In Westchester County, New York, for example, charitable giving among those reporting more than $200,000 in income rose from $1.4 billion in 2017 to $1.17 billion in 2019, according to latest IRS data.
In wealthy Marin County, California, total charitable giving rose from more than $613 million in 2017 to $585 million in 2019. These are notable in large part because California and New York are by far the largest sources of charitable dollars in the country with $36 billion and $19 billion, respectively.
This trend likely contributed to the 2020 decline in the share of dollars donated by individuals, which fell below its all-time high of 70% of all donations made that year – only the second time that this happens.
So, is the answer to restore the unlimited state and local tax deduction? A proposal by some Blue State Democrats to do just that was rejected last week by the US Supreme Court.
The court’s decision not to hear the case is a victory for those who support a progressive tax code that encourages charitable giving by all Americans — not just the wealthiest. As the Tax Foundation found, the benefits of the deduction “are overwhelmingly flowing to high-income taxpayers, particularly those in high-income, high-tax states.”
In 2016, before the tax law was enacted, 77% of those who took advantage of the deduction had incomes above $100,000, while only 6.6% earned less than $50,000.
Regardless of the effects on charitable giving, reinstating the unlimited state and community tax deduction would benefit a small number of high-income households and encourage less fiscal discipline by their state governments.
Don’t offer incentives only to the wealthy
Although the relative decline in overall individual charitable giving suggests that some adjustment to the tax code is needed, this adjustment should not be limited to the wealthy alone.
The current tax code offers an incentive for charitable donations to the small minority of mostly wealthy taxpayers who itemize their taxes. But charity, no matter how much a person can donate, inspires greater connection to civil society and should be widely encouraged.
And in an age of ever-expanding government, America should never abandon the idea that the charitable world can identify and undertake missions that government cannot do well or are not allowed to do. engage. This particularly includes the work of local organizations such as park conservancies, historical societies and community foundations, which bring all citizens together in shared and voluntary efforts.
Concerns about the overall decline in charitable giving predate the Trump-era tax cuts. A report by the Congressional Joint Economic Committee’s Social Capital Project found that while total giving increased, the percentage of Americans who donated fell from 66% in 2000 to 56% in 2014.. The report concluded that “increasing donations are coming from a decreasing share of the population”.
2 approaches to improve donations
Additional changes to the tax code could help reverse these trends. Two options should be considered to encourage charitable giving among those who are not the highest earning households.
The first option is a so-called charitable over-the-line deduction, which allows people to subtract the deduction from their gross income. An American Enterprise Institute analysis by economists Alex Brill and Derrick Choe found that replacing the current charitable deduction with an above-the-line deduction would have increased giving by $21.5 billion in 2018 and reduced tax revenue of $25.8 billion.
The second option, a tax credit that would be accessible even to households that do not detail their tax returns, is particularly promising.
The same study estimated that replacing the charitable deduction with a 25% non-refundable tax credit, which reduces the amount of tax owed, would have a greater impact on donations and a greater reduction in tax revenue than the deduction above the line, which reduces taxable income.
Specifically, it would have increased giving by $23.3 billion in 2018 and reduced revenue by $31.1 billion. The Social Capital Project report also concluded that a tax credit is more likely to increase the number of new donors than a deduction.
Make breaks permanent
For now, however, the idea of an over-the-line charitable deduction appears to have the most traction in Congress, where it has garnered at least temporary bipartisan support in recent years. In response to the pandemic, Congress approved a $300 charitable deduction for individuals and a $600 deduction for married couples. But the deductions expired at the end of 2021, and so far Congress has failed to act to make them permanent.
As part of a larger effort to encourage charitable giving among all Americans, Congress should quickly expand these deductions. Increasing the amount of charitable donations as well as the number of taxpayers who donate are two laudable goals that could be achieved through a larger charitable deduction or tax credit.
The modest decrease in federal tax revenue that would result would be offset by gains in the health of American civil society and support for organizations that help improve communities in ways the government cannot.
At the same time, Congress should resist calls to reinstate an unlimited federal income tax deduction for amounts paid in state and local income taxes. This particularly regressive tax policy does not reflect the American approach to charitable donations, hailed by observers like Alexis de Tocqueville at a time when there was no federal income tax at all. Despite the resulting decline in giving in high-tax states — at least for now — the nation stands to gain from a tax code that doesn’t discourage any income group from making charitable donations.