The new federal budget recently approved by Congress relies on tax reform to offset any potential loss of revenue. Unfortunately, some of the proposed reforms could significantly limit philanthropy in the United States. According to a study from the University of Indiana, the recent tax reform plan offered by congressional republicans and President Donald Trump would likely curb charitable giving by more than $13 billion annually. Several different parts of the proposed reforms would affect giving, which further complicates the issue. Currently, two items are occupying the minds of the philanthropy community: limitations to itemized deductions and the repeal of the estate tax.
Proposed Increases to the Standard Deduction
One of the proposals that has caused the most anxiety involves doubling the standard deductions that filers can claim. This measure is meant to simplify the tax process by reducing the need for people to itemize their deductions. As a result, fewer people would be eligible to claim a charitable deduction. Many nonprofits worry that giving to charities will decline without an explicit tax benefit to incentivize donors. At present, about one-third of all Americans itemize their deductions, but this rate could fall as low as 5 percent under the new plan.
The study from the University of Indiana’s Lilly Family School of Philanthropy largely looked at the impact of less itemization by using the 2014 Tax Reform Act as a benchmark. While the researchers acknowledged that tax deductions are not a driving force for philanthropy among most Americans, they did find that these deductions encourage people to give more than they normally would. The study considered the possibility of expanding the charitable tax deduction and predicted that such a policy would actually increase donations by more than $4 billion annually.
Representative Mark Walker, a republican from North Carolina, introduced a bill that would perhaps find a good median between these two extremes. In addition to the republican’s plan to increase the standard charitable deduction, Representative Walker proposes introducing a separate charitable deduction worth up to $2,100 for individuals and $4,200 for couples. Already, many charities and nonprofits are championing this bill regardless of the outcome of other proposals. The bill has a fairly conservative view because it limits the size and scope of philanthropy-related deductions while still encouraging Americans to continue giving. While some organizations have argued for a separate charitable deduction policy that has no cap, Representative Walker’s plan may be more palatable for a fiscally conservative government.
Growing Pressure to Repeal the Estate Tax
Another proposal that has caused some anxiety in the philanthropy community involves the estate tax. President Trump and some senators have pushed heavily to repeal this tax, but many individuals think that such a measure would hurt millions of Americans while benefiting only the wealthiest families. Currently, the tax applies only to estates valued more than $5.5 million for an individual or $11 million for a couple. Only about 5,000 estates pay the tax.
What many people do not realize about this tax is that it drives much of the charitable giving in the United States. The people who pay the tax are responsible for a significant amount of philanthropy in this country because many of them would rather give their money to charity than pay the tax. Individuals and couples can avoid the tax altogether by making a minimum contribution to various charitable organizations. Without the tax, there is less motivation to give so much.
To see the effect of repealing this tax, we can look at 2010, when the government didn’t enforce the estate tax. That year, charitable giving fell 37 percent from the year before. When Congress restored the tax in 2011, giving increased by 92 percent. The drops in giving most significantly affected colleges and universities, healthcare organizations, and community foundations.
The estate tax remains hotly contested in Washington. Many democrats see repeal efforts as a way of rewarding wealthy Americans during a time when the wealth gap is causing a great deal of social tension, but the policy has been central to Republican goals for a long time. However, not all Republicans agree with the repeal. Senator Susan Collins, for example, has spoken out against repeal by pointing out that the tax earned $18 billion for the federal government last year.
Lily Batchelder, a New York University professor who formerly worked for the Obama administration, has argued for increasing the estate tax, calling it the most progressive tax that exists in the United States. However, the Trump administration, citing research from Family Enterprise USA, claims that the tax actually hurts the economy. According to this research, up to one-fifth of family business owners say that the estate tax limits their ability to create new jobs in their communities. Congressional representatives have also opposed the estate tax, saying that it unfairly adds an additional tax on income that was already taxed. However, the Federal Reserve has estimated that most of the money targeted by the estate tax (in estates larger than $100 million) stems from investment gains that were never previously subject to capital gains taxes.