Household charitable giving could drop 4 percent this year as a result of the Tax Cuts and Jobs Act (TCJA), primarily because of more high-income taxpayers claiming the standard deduction, according to the latest projections.
The American Enterprise Institute (AEI) estimated a drop of some $17.2 billion, or $16.3 billion assuming modest economic growth in the short term. “To the extent that the TCJA yields pro-growth impacts on the economy, the negative impact on charitable giving will be reduced,” according to “Charitable Giving and the Tax Cuts and Jobs Act,” by Alex Brill, resident fellow, and Derrick Choe, research assistant, at the AEI. Brill previously served as policy director and chief economist of the House Ways and Means Committee and also on the staff of the White House Council on Economic Advisors.
Other recent studies examining how giving would be impacted by tax policy changes have estimated a decline of anywhere from $12 billion to $20 billion. Last year, charitable giving in the U.S. was estimated to be $410 billion, with about $287 billion from individuals.
About 83 percent of the expected decline is attributed to the increase in the standard deduction, with about $3 billion associated with lower marginal tax rates for high-income earners. For middle- and upper-middle-income tax filers, the increase in the standard deduction is responsible for nearly all the change in giving, according to the AEI study.
The standard deduction almost doubled under the tax reform legislation, from $6,300 to $12,000 for single taxpayers, and from $12,600 to $24,000 for married couples. Marginal tax rates were reduced, which also reduces the tax incentive for giving by taxpayers who itemize. The report did not look at what impact doubling the estate tax exemption or reducing the corporate tax rate would have on giving.
The study estimates that 27.3 million taxpayers will switch from itemizing their deductions to claiming the standard deduction in 2018 while 19.9 million will continue to itemize.
The AEI study estimates that individual giving would have increased to $296 billion in 2018 if not for the TCJA, with itemizers making up $221 billion of that total.
The top 5 percent of tax filers – those with Adjusted Gross Income (AGI) of more than $202,000 – are responsible for almost 20 percent of individual donations. The number of households in that category that claim the standard deduction is expected to increase from 550,000 to 3.3 million under the new tax law.
The Congressional Budget Office (CBO) estimates that the tax reform bill will boost real Gross Domestic Product (GDP) by 0.3 percent in 2018, and by 1 percent by 2022. A full percentage point increase in GDP by 2022 would offset about $3.2 billion in reduce giving.
What would offset reduced giving even more, the report estimates, is extending the charitable deduction to all taxpayers, or replacing it with a flat-rate 25 percent nonrefundable tax credit. “Both policies encourage giving by reducing the average price of charitable giving,” the report noted.
The report examines four scenarios involving those two options, including a floor of $500 and no floor with each. The impact on charitable giving ranges from $19.1 billion (universal deduction with a $500 single/$1,000 married floor) to $23.3 billion (25 percent tax credit, no floor). In each scenario, the net impact on charitable giving would offset any impact from TCJA, ranging from $1.9 billion to $6.2 billion.
“An above-the-line deduction with a floor would, while modestly more progressive, most closely match the level and distribution of giving under pre-TCJA law,” the report concluded.