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A Giving USA report released last week shows that US households’ charitable donations in 2018 experienced the largest decline since the Great Recession. We hate to say we told you so, but we told you so. In an Economic Perspectives paper last year, we predicted that the Tax Cuts and Jobs Act of 2017 (TCJA) would reduce the tax incentive for charitable giving by households. We also offered reform options to alleviate that impact.
Tax incentives have been found to play a role in people’s giving decisions. For example, if a $100 donation earns taxpayers $25 of tax savings, they are often willing to give more than if their donation earns no tax benefit at all. The TCJA reduced individuals’ tax benefits for giving, primarily by nearly doubling the standard deduction. Although that change was a tax cut and a great simplification for many taxpayers, it also prompted more filers to claim the standard deduction, preventing them from claiming a deduction for their charitable giving.
To estimate the impact of this change on charitable giving, we used AEI’s Open Source Policy Center’s Tax Calculator, a microsimulation model of the US individual income tax, as well as assumptions about the effect of taxes on giving that we based on evidence from the academic literature. To start, we extrapolated Giving USA’s historical giving data available to estimate charitable giving in 2018 absent TCJA.
We then modeled the individual income tax changes in the TCJA. We estimated that 27.3 million tax filers would switch from itemizing their deductions to claiming the standard deduction, thus losing their tax incentive to give to charity. In addition, many taxpayers who continued to itemize would be discouraged from giving; lower marginal tax rates reduce the tax benefit of giving. We projected that the TCJA would decrease individual giving in 2018 by $16.3 to $17.2 billion, relative to what would have occurred without the TCJA.
What actually happened? Household giving in 2018 dropped $15.5 billion, almost exactly the impact we predicted from the TCJA. The accompanying graph illustrates the historical household giving data, our baseline pre-TCJA forecast and the actual 2018 result reflecting the impact of TCJA. (Note: The baseline forecast in this graph has been updated to reflect new historical giving estimates from Giving USA.)
While we are pleased that our forecast was validated, we are concerned that charitable giving took such a hit. However, tax policy options to restore household giving exist. For example, an above-the-line deduction for charitable donations (that can be claimed by taxpayers who use the standard deduction) or a 25 percent tax credit for giving could increase household giving to pre-TCJA trends. Limiting these breaks for giving in excess of a $500 floor for individuals ($1000 for joint filers) would reduce the fiscal impact while preserving most of the boost in giving incentives. The table below, borrowed from our paper, summarizes the revenue loss and the giving impact of these options.
The Giving USA report also came with good news; giving by foundations and corporations increased by 7.3 and 5.4% respectively, and total charitable giving was at the second highest level in history. However, if policymakers want to boost individual giving, they will need to address an unintended consequence of TCJA and reform the tax treatment of charitable giving.
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