Conditions That May Affect the Outlook for Giving
On December 22, 2017, the Tax Cuts and Jobs Act (Public Law No: 115-97; previously H.R. 1) was signed into law, significantly changing federal tax policy. The law continues to raise questions about the effects of tax policy changes on charitable giving.
Historically, research has shown that taxpayers adjust how much they donate to qualified charities in a given year based in part on whether their donations are tax deductible and how this deduction affects their tax liability. However, scholars do not agree on exactly how responsive donors are to changes in tax policy.
Although the full impact of the Tax Cuts and Jobs Act (TCJA) on philanthropy still cannot be determined with certainty, multiple reports were released in 2018 that examine the combined effects of various elements of the legislation on charitable giving. In this section, we provide a recap of the major provisions of the TCJA that are expected to impact philanthropy in the coming years. We then summarize the results of recent analyses that have estimated how the legislation will affect total giving, primarily as a result of changes in individual/household giving.
Overview of Tax Policy Changes
The TCJA increased the standard deduction from $6,350 in 2017 to $12,000 in 2018 for individuals and from $12,700 in 2017 to $24,000 in 2018 for couples with annual increases for inflation. Nearly doubling the standard deduction may substantially reduce individual/household giving due to a projected drop in the number of taxpayers who itemize their deductions. The law also decreased the top marginal tax rate for individuals and couples from 39.6% to 37%. Decreasing the top marginal tax rate could lead to a slight decline in individual/household giving by reducing the tax incentive to make charitable donations.
Additionally, the TCJA capped the state and local income, sales, and property tax deduction at $10,000. Capping the state and local tax (SALT) deduction may decrease individual/household giving by reducing the number of individuals who itemize, as well as affect to whom high-income households give. As of August 2018, several states had passed or were considering workarounds to the SALT deduction cap.15 For example, New York, New Jersey, Connecticut, and Oregon have approved legislation that provides residents with state tax credits for certain charitable contributions.
Meanwhile, in August 2018, the IRS proposed rules limiting the federal deduction allowable to taxpayers who receive state and local tax credits for charitable donations.16 With the exception of tax credits for 15% or less of the amount contributed, taxpayers claiming the charitable deduction must now reduce the amount claimed on their federal returns by the amount of the state or local credit they received.
The TCJA increased the estate tax exemption from $5.5 million in 2017 to $11.2 million in 2018 for individuals and from $11 million in 2017 to $22.4 million in 2018 for couples. Estates tend to respond more slowly to policy changes than other sources of giving. However, one study found a statistically significant link between increasing the exemption level for the estate tax and a decrease in bequest giving (likely due to a reduction in the tax incentive to give).17 Donors may also be motivated to give more during their lifetimes if they know their estates will be subject to the estate tax.19 Thus, fewer estates being subject to the tax under the new legislation could decrease lifetime contributions.
The TCJA changed the corporate tax rate from bracketed tax rates with a top marginal rate of 35% to a flat rate of 21%. Research on the effects of tax reform on corporate giving is mixed. Some suggest that reducing the top corporate tax rate may decrease incentives for corporate giving.19 Others expect companies to spend more in their communities as a result of the increased profits they are likely to see under the law.20
Indeed, several companies credited the TCJA for their increased generosity in 2018. For example, Best Buy allocated an additional $20 million for its corporate philanthropy, and U.S. Bank made a one-time contribution of $150 million to its foundation, both citing the new legislation.21 However, philanthropy experts caution that this trend could be attributed to strategically timed public relations efforts and is unlikely to continue in the long term.
Impact of Tax Policy Changes on Charitable Giving
In January 2018, the Tax Policy Center (TPC) released a report estimating that the TCJA will lead to a 5% decrease in charitable giving, and that future donations will come from fewer and wealthier donors.22 TPC projects that the law will reduce the number of households claiming the charitable deduction from approximately 37 million in 2017 to approximately 16 million in 2018.
TPC also predicts that the percentage of middle-income households claiming the charitable deduction will drop from around 17% to around 5.5%.23 Among those earning between $86,000 and $150,000 annually, the share of households claiming the charitable deduction will fall from about 39% to about 15%t. Additionally, TPC expects that the TCJA’s changes to individual income tax rates will lower the average marginal benefit of giving from 20.7% to 15.2%. Although the marginal tax benefit of giving will decline substantially for low- and moderate-income itemizers, the highest-income itemizers’ marginal tax benefit of giving will remain largely unchanged.
In a June 2018 report, American Enterprise Institute (AEI) predicted that the TCJA will reduce charitable giving by $17.2 billion, or 4%, on a static basis (assuming fixed GDP) and $16.3 billion, or 3.8%, on a dynamic basis (assuming modest economic growth).24 AEI uses the Open Source Policy Center’s Tax Calculator to analyze TCJA’s impact on charitable giving by individuals.
The report projects that 83% of the decline in charitable giving will be driven by an increase in the number of taxpayers who claim the standard deduction.25 AEI expects that 27.3 million taxpayers will switch from itemizing their deductions to claiming the standard deduction in 2018.The remainder of the decline in charitable giving is primarily associated with lower marginal tax rates for high-income Americans. The price of giving for the 19.9 million taxpayers who continue to itemize will increase slightly due to a decline in their marginal tax rate.
Finally, the University of Pennsylvania Wharton School of Business used its tax microsimulation model (Penn Wharton Budget Model) to estimate percent changes in charitable giving by income level in a report released in July 2018. Totaling the results across all income groups, the Penn Wharton Budget Model estimates that the TCJA will decrease total giving by about $22 billion, or 5.1%, in 2018.26 The model also predicts a 9.6% decline in giving reported on individual tax returns.