How Can Changes to the Tax Code Improve Charitable Giving?

We reported how there’s been a 1.7% decrease in charitable giving since the institution of the Tax Cuts and Jobs Act of 2017—even with 64% of households paying less in income taxes over that period than period than they would have under the old laws. That decline potentially amounts to billions less year over year.

Yet this year’s presidential candidates have been largely silent on ways to increase tax incentives for charitable giving, perhaps missing a prime opportunity to substantially increase tax-motivated giving.

Lots of us give because we believe it’s the right thing to do. But a 2013 study indicated that tax incentives also encourage giving. By discouraging taxpayers from itemizing deductions, the Tax Cuts and Jobs Act effectively removed that incentive for nearly nine out of 10 households, according to The Tax Policy Institute.

Giving is expected to fall even further

Americans, on average, donate about 2% of our income each year to charities. In 2018, we gave $427.71, according to The Tax Policy Institute. But the share of US households that give to charity is falling, and it’s a trend that predates the Tax Cuts and Jobs Act.

The recession of 2008 is largely responsible for the 13% drop in the share of households that donated to charity between 2000 and 2016, according to the Indiana University Lilly Family School of Philanthropy. Which amounted to about 20 million households per year who stopped giving.

The Tax Cuts and Jobs Act appears to be accelerating that trend. By increasing the size of the standard deduction and curbing the state and local tax deduction, effectively eliminating the tax benefit for middle-income givers on their donations, the Tax Cuts and Jobs Act reduced the share of itemizers from about 30% in 2017 to about 13% in 2018. The Tax Policy Institute expects that number to fall even further in 2019, to 9%.

A universal tax deduction

What can be done? One suggestion that’s being floated is a universal tax deduction for those who donate more than a specified share of adjusted gross income, say 1%. It’s not likely to discourage anybody from giving, and it may even encourage those who can give the most to give more.

As it stands, middle-income households receive less than 2% of the benefit of the charitable deduction, while the highest-income 1% (those who make $750,000-plus per year), receive nearly 60%, according to The Tax Policy Institute. 

With a universal tax deduction, the tax incentive would shift to lower- and middle-income taxpayers. The concept also fits well within a presidential candidate’s platform that aims to make sure the wealthy won’t disproportionately benefit from the tax code.