As Congress and the administration prepare to take on comprehensive tax reform, they will be making changes that will impact individual taxpayers.
Many proposals that have started to surface could have a detrimental impact on charitable giving. The Republican House "blueprint" for tax reform calls for tripling the amount of the standard deduction. Doing so would reduce the number of filers who itemize their deductions (and therefore receive the full value of the charitable deduction). This would reduce the number of itemizers from currently over 30 percent of filers to only 5 percent of filers with the highest incomes. While many people will still make charitable donations, various estimates predict charitable giving nationwide could be reduced by more than 10 percent, more than $25 billion annually!
It is not yet clear what President Trump's tax reform proposal will include, though in the past he has called for a cap on the amount of itemized deductions that can be claimed. The cap proposal, limiting itemized deductions to a maximum of $100,000 and $200,000 for single and married filers respectively, would be truly disastrous if combined with the Republican "blueprint."
I was one of the 200 nonprofit leaders to attend the Charitable Giving Coalition event in Washington. I was intrigued to hear arguments from a Republican senate staffer, who thought I simply had a cynical view of donors. I do not.
There is ample proof that the amount people give is directly influenced by the economic incentives created in the tax code. When the value of the incentive is reduced, so are gifts to charity. This was the case after the federal tax reforms of 1986, when the reduction in the top tax rate reduced the value of the charitable deduction.
State laws impacting charitable giving have also proven that total giving is influenced by tax incentives. In 1981 Hawaii placed a cap on charitable deductions. This move did raise an additional $12 million in tax revenue but reduced overall charitable giving in the state by $60 million annually.
The current plans being discussed in Washington miss an important point. They are solely focused on the benefit to the donor without considering the benefit to the nonprofits and the constituents they serve. In nearly all nonprofit organizations the largest single expense is personnel. Yes, a wealthy donor may receive a tax benefit for donating a million dollars, but that donation is likely to create 15 or 20 jobs in the nonprofit sector. Those nonprofit employees also pay taxes and generate economic activity in their own communities. Donations are truly an investment in our economy.
The diverse Charitable Giving Coalition, encompassing religious, educational, arts groups, and scads of others is intentionally seeking that Congress retain the full "scope and value" of the charitable deduction rather than requesting that "nothing change." We need to ensure that whatever tax reform looks like, taxpayers will continue to have an incentive to support their preferred charities, and have perhaps even greater or broader incentives as government revenue is reduced and support for the myriad service agencies is increasingly fragile.
Please let your elected officials know that you care about the nonprofit sector and the importance of retaining the full scope and value of the charitable deduction.