Study: Tax Hikes Would Affect Giving More Than Deduction

October 28, 2011       Mark Hrywna      

Allowing Bush-era tax cuts to expire after next year would have a greater negative impact on charitable giving than reducing the charitable deduction, according to a new study released today.

Total itemized giving would have declined by 0.4 percent, or $0.82 billion, in 2009, compared with 1.3 percent, or $2.43 billion, in 2010, if both proposals had been in effect, according to the study conducted by the Center on Philanthropy at Indiana University, and sponsored by Campbell & Company, a Chicago-based consulting firm. Giving from those households with $200,000 or more in income specifically would have decreased by 1.6 percent in 2009 as a result of the cap, and by 2.4 percent in 2010, when both proposals would be in effect.

“This suggests a relatively small direct impact, but combined with the weak economic climate, funding reductions and increased demand for services already affecting some nonprofits and their constituents, these changes are likely to have an additional negative effect in the long term,” said Patrick Rooney, executive director of the Center on Philanthropy (CoP).

Using historical tax data, the study examines how itemized charitable giving would have been affected in 2009 and 2010 had the proposals been initiated. In the second year of the study, both changes take effect: the charitable deduction limited to 28 percent (versus the current 35 percent) and marginal tax rates returning to 39 percent for the wealthiest households.

The Obama administration several times has proposed limiting tax deductions for wealthy households — including the deduction on charitable giving — from 35 percent to 28 percent. Only households with adjusted gross income of $250,000 annually, $200,000 for individuals, would be affected. The second proposal would raise the marginal income tax rate from 35 percent to 39.6 percent in 2013 for those taxpayers.

Lawmakers last year extended the Bush-era tax cuts for all taxpayers through 2012. The administration previously has supported making those cuts permanent for households with income of less than $200,000 while allowing them to expire for those making more.

In 2008, these affected households represented 4.4 million of a total 144 million individual tax returns filed, or 3 percent of all returns. In 2008, these households claimed 43.5 percent of all itemized charitable gift deductions claimed on individual returns, almost $69 billion of the total $170.4 billion claimed by all itemizers.

“One of the things we did was to look at other existing studies and what their estimations look like,” said Una Osili, CoP’s director of research. It’s the third study released this month that looks at how some proposed tax policies might affect charitable giving. Osili said all the studies compliment one another, providing a range of just how the public might react to changes in tax policy.

The Urban-Brookings Tax Policy Center’s study projected a decrease in charitable contributions of $1.7 billion to $3.2 billion if the charitable deduction were capped at 28 percent. A study by the Urban Institute pegged donations falling between $2.9 billion and $5.6 billion. In all, charitable giving was estimated to be $290 billion last year, the majority of it coming from individuals.

“The idea is to look broadly at how these proposals affect the nonprofit sector,” she said, understanding the key drivers of charitable giving in the overall state of the economy. Tax incentives do matter, she added, but the biggest effect on donations is increasing wealth and income.

Donor behavior might change in different ways, Osili said, adding that donors might earlier, in anticipate of tax rates going up, to take advantage of current deduction laws, or they think changes will be temporary or permanent.

“Ultimately, changes in household economic circumstances have a greater impact on charitable giving than do tax rate changes,” Rooney said. “Regardless of tax policy, improving the economy is critical to increasing charitable giving.”