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IU research shows GOP tax plans could hurt charitable giving

May 24, 2017

Charitable giving could decrease if proposed Republican tax policies are enacted, according to a new study from the IU Lilly Family School of Philanthropy.

The study was commissioned by Washington, D.C.-based Independent Sector, an advocacy group for charitable organizations. It looked at the impact several proposed GOP tax plans could have on overall charitable giving and total tax revenue.

The research is based on standards in the 2014 Tax Reform Act, which was introduced by former House Ways and Means Committee Chairman Dave Camp (R-MI). But the proposal is similar to the more recent policies introduced by U.S. House Republicans and the White House. All of the proposals call for reducing the top marginal tax rate to 35 percent or less and doubling (or nearly doubling) the standard deduction.

Under current law, the standard deductions are $6,300 for individuals and $12,600 for joint filers. Under the three proposals scrutinized by the study, the deductions would rise to at least $11,000 for individuals and $22,000 for joint filers.

IU researchers also considered what the impact would be if the charitable deduction was expanded to all taxpayers. The charitable deduction was added to the tax code in 1917 to provide an incentive to donate, but only applies to those who itemize their deductions, which is about 30 percent of U.S. households.

In 2015, more than $370 billion was donated to charity in the U.S., and nearly $217 billion of that came from households that itemize.

The study's results show that if the standard deduction was increased and the top tax bracket was decreased, charitable giving could drop by up to $13.1 billion annually. In effect, under those two circumstances, taxpayers would have less incentive to make itemized deductions, and thus might not give as much to charities.

The $13.1 billion loss would be a decrease of 4.6 percent, which would be the biggest drop since the annual decreases recorded from 2007-2009 and worse than all other recessions, according to Patrick Rooney, associate dean for academic affairs and research at the IU Lilly Family School of Philanthropy.

“For a lot of charities, they’re operating on a pretty slim margin,” Rooney said. “A drop in [an organization's] [organization] income [for an organization] usually means a reduction in its labor force, which then means a reduction in the constituents they can serve… so it is important.”

Giving to religious congregations could drop by 4.7 percent and gifts to other charities could be reduced by 4.4 percent. Rooney said this proves donations to religious institutions are not immune to tax policy changes.

“People have a misperception,” Rooney said. “Incentives matter.”

“For a lot of politicians, they think, 'Increase the standard deduction, that simplifies the tax code,'” Rooney said. “It’s not that they are anti-philanthropy, it’s that they’re not thinking about the unintended consequences.”

But if Congress expanded the charitable deduction to non-itemizing taxpayers, it would more than offset the losses from increasing the standard deduction and reducing the highest tax bracket, with an increase of $4.8 billion—or 1.7 percent—in charitable giving.

The charitable deduction was added to the tax code in 1917 to provide an incentive to donate, but only applies to those who itemize their tax returns. About 30 percent of U.S. households itemize their deductions.

If considered as a standalone provision, expanding the charitable deduction to all taxpayers could generate up to $12.2 billion in additional giving, according to the IU study.

All of the scenarios would have a negative impact on total tax revenue, according to the study, but the smallest decrease—0.03 percent—would be seen if only the charitable deduction was extended to all taxpayers without the other provisions.

The biggest drop in tax revenue—3.6 percent—would occur if both the standard deduction was increased and the top tax rate was decreased. The imapct would be about the same if the universal charitable deduction was also implemented with the other two provisions.

Rooney said the school isn’t proactively reaching out to members of Congress, but would answer questions from any interested parties.

“If you get a bunch of people in the room and it’s five minutes before midnight, and they have to get it resolved by midnight, they’re not looking at this,” Rooney said about the research. “But our hope is this is deeply instilled.”

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