Changes in Tax Code Could Significantly Impact Charitable Giving

Unlike other tax incentives-for buying a home, installing energy-efficient windows, or buying a fuel-efficient car-the charitable deduction is unique in that it rewards behavior that, by definition, provides no direct benefit to the individual. Whatever options are on the table for tax reform, the tax code should continue to encourage the selfless act of giving to charity.

In an ideal world, changes would both increase charitable giving and save the government money. A new study from the Congressional Budget Office (CBO), “Options for Changing the Tax Treatment of Charitable Giving,” examines 11 ways that changes in the tax code could impact individual charitable giving and evaluates what each would mean for federal tax revenue.

The CBO report found that:

• Allowing all taxpayers (not just itemizers) to claim the charitable deduction would increase gifts to charity by an estimated $2 billion (1 percent) but would cost the government nearly $5.2 billion in tax revenue.
• Replacing the current deduction with a 25 percent tax credit would also likely increase charitable donations but not as much as it would decrease government revenues. A similar proposal using a 15 percent credit instead of a 25 percent one would result in both decreased giving and decreased revenue-a clear nonstarter.
• Keeping the deduction but allowing individuals to decrease their taxes only by the amount above a charitable threshold would increase both giving and federal tax revenue. For example, if individuals could deduct gifts to the extent they exceed $500, the CBO estimates that giving would rise by $800 million and the government would collect an additional $2.5 billion in taxes.

This last policy could be a win-win for deficit hawks and the philanthropic sector. However, key questions remain. For example, will it work? The CBO acknowledges that its study includes data that are five years old and therefore don’t reflect the current economic climate. The study also looks backwards, making assumptions about what revenue and giving would have been if these changes existed in the past.  

This is particularly important as we predict the actions of high-income taxpayers. The top 13 percent of taxpayers account for almost 60 percent of all charitable gifts. Because so few give so much, even relatively minor changes in their giving could leave many charities even more cash-strapped than they already are. An upcoming study by The Center on Philanthropy at Indiana University (expected this fall) will take a closer look at precisely how high-net worth families are likely to respond to other proposed changes in tax policy. The Council, working on behalf of the philanthropic sector, is committed to ensuring any changes in the tax code enhance, not hurt, charitable giving.

Shelton Roulhac is a senior policy analyst for government relations at the Council on Foundations.