Proposals to Cap Charitable Deduction, Raise Tax Rates Likely to Have Relatively Small Negative Impact on Overall Charitable Giving, Study Finds
Combined with recession’s effects, slow recovery and potential government funding cuts, changes could negatively affect charities
The Obama Administration’s proposals to reduce the charitable tax deduction for wealthy households and to increase the marginal income tax rates they pay would, by themselves, have a modest negative effect on itemized charitable giving, according to a new study conducted by the Center on Philanthropy at Indiana University and sponsored by Campbell & Company.
The first proposal would reduce the value of itemized charitable deductions from the current 35 percent to 28 percent in 2012 for taxpayers with an adjusted gross income over $250,000 for couples or $200,000 for individuals. The second proposal would raise the marginal income tax rate from 35 percent to 39.6 percent in 2013 for those taxpayers.
The study looks at how itemized charitable giving would have been affected in 2009 and 2010 (using historical tax data) if the proposals had been initiated in those years, respectively.
“Our estimates indicate that if the Administration’s proposals had taken effect in 2009 and 2010, total itemized giving would have declined by 0.4 percent in the first year and by 1.3 percent in the second year,” said Patrick M. Rooney, executive director of the Center on Philanthropy. “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.”
The report estimates total itemized giving would have decreased by $0.82 billion in the first year and would have declined by $2.43 billion in the second year, when both changes were in effect.
Looking only at the impact on giving by households with $200,000 or more in income, the study estimates that itemized giving from those households alone would have decreased by 1.6 percent in 2009 and by 2.4 percent in 2010.
The study indicates that the higher tax rates, which would go into effect in the second year, would have a larger impact on giving than would capping the charitable deduction at 28 percent.
“We hope this timely research will help inform the current dialogue about the relationship between philanthropy and public policy,” said Peter J. Fissinger, president of Campbell & Company. “The report’s estimates demonstrate the importance of considering the effect of these proposals—and of other tax and fiscal policy proposals—on nonprofits and philanthropy as part of the policy debate.”
The Administration’s proposals affect taxpayers with an adjusted gross income over $250,000 for couples or $200,000 for individuals. In 2008, these households represented 4.4 million of a total of 144 million individual tax returns filed, or 3 percent of all tax returns. In 2008, these 4.4 million returns claimed 43.5 percent of all itemized charitable gift deductions claimed on individual tax returns. This represents a total of $68.93 billion claimed by high income households out of a total of $170.4 billion claimed.
The study provides conservative estimates of the impact of the Administration’s proposals. Several additional factors, such as when the changes go into effect and how that specific timing affects donors’ behaviors, could also affect the impact of the proposals. For example, donors might choose to “pre-give” in an earlier year to take advantage of more favorable tax treatments before the changes take effect. Donors’ perceptions of whether the changes are likely to be temporary or permanent might also affect the impact on giving.
“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.”
The full report is available at https://philanthropy.indianapolis.iu.edu/Research/taxpolicy.aspx
About the Center on Philanthropy at Indiana University
The Center on Philanthropy at Indiana University is a leading academic center dedicated to increasing the understanding of philanthropy and improving its practice worldwide through research, teaching, training and public affairs programs in philanthropy, fundraising, and management of nonprofit organizations.
About Campbell & Company
Campbell & Company is a national consulting firm offering advancement planning, fundraising, communications and executive search services for nonprofit organizations in the education, health and medicine, arts and culture, environment, social service, and professional society fields.
Through thirty-five years and thousands of engagements, Campbell & Company has helped nonprofit organizations anticipate and manage the challenges of the philanthropic marketplace. The company maintains offices in Chicago, Boston, Los Angeles, Portland, the San Francisco Bay Area and Washington, DC. For more information, please telephone 866-957-0000 toll free, email info@campbellcompany.com or visit www.campbellcompany.com.