Tax Policy Proposals Would Reduce Charitable Giving, New Study Finds

Lowering top rate, raising standard deduction cuts donations; adding non-itemizer deduction increases giving, Indiana University Lilly Family School of Philanthropy research suggests

Tax policy changes proposed by Congress and the Administration would reduce charitable giving by up to $13.1 billion, new research conducted by the Indiana University Lilly Family School of Philanthropy indicates.

Researchers also found that adding a charitable deduction for non-itemizing taxpayers to the policy proposals would likely more than offset the loss in charitable giving from the proposals and generate up to $4.8 billion in additional charitable giving.

The study used the 2014 Tax Reform Act introduced by then House Ways and Means Committee Chairman Dave Camp (R-MI) to estimate the potential effects of tax policies on charitable giving. The tax proposal released by the Administration last month and the Republican legislators’ proposal both closely mirror the Camp proposal with respect to reducing the top marginal tax rate and increasing the standard deduction.

The study was commissioned by Independent Sector, a national membership organization of nonprofits, foundations and corporations, with funding from Leadership 18, an organization comprising national human service nonprofits.

Among the study’s key findings:

• Extending the charitable deduction to non-itemizing taxpayers by itself, without other proposals, could generate up to $12.2 billion in additional giving.
• Reducing the top tax rate to 35 percent and increasing the standard deduction combined have the potential to reduce charitable giving by up to an estimated $13.1 billion.
• The study estimates that those two proposals combined would reduce charitable giving to religious congregations by up to 4.7% and reduce giving to other charitable organizations by up to 4.4%.
• Each of these proposals alone (reducing the top tax rate and increasing the standard deduction) also would reduce charitable giving.
• Adding a non-itemizer deduction while lowering the top tax rate to 35 percent and increasing the standard deduction would likely more than offset the amount of charitable giving that would otherwise be lost under those two proposals, generating an estimated additional $4.8 billion in giving, beyond the offset.

“When talking about changes in tax policy, it is important that the debate is informed by research. This study provides important information about the expected effects of the proposed tax policy changes and the extension of the charitable deduction to non-itemizers,” said Patrick M. Rooney, associate dean for academic affairs and research at the Indiana University Lilly Family School of Philanthropy.

Much of the research on this topic relies on tax data from itemizing households only, but by using data from the school’s Philanthropy Panel Study (PPS) and the University of Michigan’s Panel Study of Income Dynamics, the new study includes giving by both itemizing and non-itemizing households and can isolate the giving behaviors of each. PPS allows the study to track behaviors of the same 9,000 households over time and provides more information about the households studied. It uses a much larger and nationally representative cross-section of lower- and middle-class households—the households who would be the most affected by extending the charitable deduction to non-itemizers.

By combining the researchers’ approach to calculating the effect of a change in tax price among different income brackets with PPS data about household giving by non-itemizers, the study is able to estimate the different effects that the proposed policies would have on different income brackets. The use of PPS data also allows researchers to estimate the relative effects that adding a non-itemizer deduction would have on giving to religious congregations as compared to giving to other charities.

Download the full report.

About Lilly Family School of Philanthropy
The Indiana University Lilly Family School of Philanthropy is dedicated to improving philanthropy to improve the world by training and empowering students and professionals to be innovators and leaders who create positive and lasting change in the world. The school offers a comprehensive approach to philanthropy through its academic, research, and international programs, and through The Fund Raising School, Lake Institute on Faith & Giving, and the Women’s Philanthropy Institute. Learn more. Follow us on Twitter @IUPhilanthropy and “Like” us on Facebook.