Billions in Charitable Giving Could Be Lost, New Research on Tax Bill Shows

New research commissioned by Independent Sector finds that two provisions in the tax bill moving through Congress would cut charitable giving by far more than the government would gain in tax revenue.

Both provisions have already passed the House and were included in draft legislation prepared by the Senate Finance Committee.

The first study, conducted by researchers at Indiana University’s Lilly Family School of Philanthropy, looks at a proposal to cap the value of itemized deductions at 35 percent — meaning that wealthy donors who pay tax at the top marginal rate of 37 percent would no longer receive as much tax benefit from their giving as they do under current law.

The study found that the change would lead to a decline in giving of $4.1 billion to $6.1 billion per year — or $41 billion to $61 billion over 10 years. That’s a bigger loss in giving than the government would gain: The Joint Committee on Taxation found the provision would raise only $34.4 billion in tax revenue over 10 years.

Wealthy donors account for a growing share of the support for the charitable sector, as everyday donors pull back from giving. The research notes that wealthy donors — in this case, couples with an adjusted gross income of $751,000 or more per year — are more likely than others to change their behavior as tax incentives change.

The second study, conducted by Ernst & Young, looks at the provision to establish a 1 percent floor on charitable giving by corporations — meaning a company would have to exceed that floor to get any tax benefit from its giving. The typical company gives slightly less than 1 percent of pre-tax profits per year, according to Chief Executives for Corporate Purpose.

The researchers examined different possibilities, with the best-case scenario being that corporations would “bunch” their giving into certain years to exceed the floor and receive some tax benefit. For example, the study notes that a company that had been donating $2 million annually might instead donate $6 million every three years to gain a greater deduction.

The provision is expected to result in $4.2 billion in lost giving annually if bunching becomes common, or a loss of $4.8 billion with continuous giving and no bunching behavior. Averaging the two methods produces a 10-year charitable giving loss of $45 billion. That’s a much bigger loss than the government would gain: The 1 percent floor on corporate giving is expected to raise just $16.6 billion in federal tax revenue over 10 years, according to the Joint Committee on Taxation.

“You’re losing almost three times as much in giving as you’re getting in government revenue,” said Ben Kershaw, Independent Sector’s director of public policy and government relations. “So even if you accept this warped worldview, it’s a terrible design.”

Independent Sector and three other national advocacy organizations sent a letter signed by 2,300 organizations to Senate leaders earlier this month arguing that the tax bill does far more harm than good. “The nonprofit sector must not be used as a revenue source to pay for other unrelated policies,” the letter said.

The Senate is expected to vote on the tax bill in the coming days. It would then return to the House for another vote. President Trump is still pushing to have a final bill that he can sign into law by July 4.