The nation’s nonprofit organizations have been on the defensive over the subject of tax policy in recent years. Indeed, they have had good reason to fear that charitable giving’s special status in the U.S. tax code might be eroded as politicians — including some of the 2016 presidential contenders — offer ideas for overhauling the tax code.
After all, last year the former head of the House Ways and Means Committee, Rep. Dave Camp, floated a tax bill that would have limited the attractiveness of the fastest-growing charitable-giving vehicle, donor-advised funds.
“Simply put, any tax overhaul that would limit deductions for state and local taxes and mortgage interest but spare the one for charitable giving could be a boon to philanthropy”
Meanwhile, the Obama administration has consistently proposed to limit the value of the charitable tax deduction to 28 cents on the dollar — even as the top marginal tax rate has risen to nearly 40 percent. Such an increase in the "cost" of charitable giving could, according to estimates, prompt donations to fall by as much as $9 billion a year.
Hillary Clinton has endorsed that same 28 percent limit.
But some Republican tax proposals — notably those of Marco Rubio, Ted Cruz, Jeb Bush, and Donald Trump — could set the stage for a different scenario: an increase in charitable giving that could result from limiting or eliminating other major deductions that have been used by those who give disproportionately to charity — affluent donors from "blue" (politically Democratic) and high-tax states.
A 2012 Bank of America study, for instance, found that charitable giving by high-net-worth households averaged $94,000 in the Northeast, which has a cluster of such states — compared with just $37,000 in the Great Lakes states.
The affluent are most likely to take advantage of the charitable tax deduction — and they account for a significant share of charitable giving. In 2013, fewer than 4 percent of Americans who paid income taxes earned more than $200,000, but, according to IRS and "Giving USA" data, their $92 billion in itemized giving accounted for more than 27 percent of the $335 billion in total charitable giving.
The largest share of such donors lives in the Northeast and California, home to the biggest percentage of Americans who itemize. Most have availed themselves not only of the charitable tax deduction but of other major deductions, notably for mortgage interest and state and local taxes — which Republican candidates now have proposed to cap.
Such deductions have been sizable in states where both housing prices and tax rates are high. In 2013, households in New York earning $200,000 or more took mortgage-interest and state and local tax deductions averaging roughly $103,000. In California, that figure was $85,000 — compared with just $50,000 in Ohio and $30,000 in Texas.
Simply put, any tax overhaul that would limit deductions for state and local taxes and mortgage interest but spare the one for charitable giving could be a boon to philanthropy.
That’s how Republican tax plans seem to be shaping up. Both Jeb Bush and Marco Rubio, for instance, have proposed to end outright the deduction for state and local taxes. Mr. Bush — taking a page from Mitt Romney’s 2012 campaign playbook — has proposed to limit all deductions, except those to charity, to 2 percent of income. In high-cost blue states, mortgage interest alone frequently tops the 2 percent figure. (Indeed, IRS data indicate that the average mortgage-interest deduction nationally for those earning $200,000 to $500,000 is equal to 3.9 percent of income.)
Senator Rubio, for his part, has hinted at a modified mortgage-interest deduction. And Donald Trump would keep that tax break but would reduce or cut other "deductions and loopholes available to the very rich."
Mr. Cruz would limit the mortgage deduction to the first $500,000 of a home’s purchase price. That’s small change in Boston, New York, much of California, and other places. So if the charitable deduction is one of the only unlimited tax breaks remaining, the affluent would have more incentive to increase their giving. (I wrote about the impact of tax-code changes on blue-state charitable donors in the December 2013 Manhattan Institute paper "Tax Reform and the Charitable Deduction: the Risk to Blue-State Philanthropy.")
It’s important to note that Senator Cruz and Ben Carson have also proposed a universal flat income-tax rate of 10 or 15 percent, respectively. Such a low rate would offer less of a tax-related incentive to give. And Mr. Carson would also do away with the charitable deduction. However, Senator Cruz would couple the flat tax with a broad-based value-added or consumption tax, making for a lower income-tax bill but still leaving the charitable deduction as a way to further reduce one’s tax bill.
Of course, it may be true that flat-tax plans would lead to higher economic growth, making more wealth available for charitable donations. And many taxpayers who do not itemize at all are nonetheless charitable givers.
Overhauling the tax code is a perennial white whale for lawmakers. But it will not come easy. Even in a Republican administration, a tax plan that targeted breaks for mortgage interest and state and local taxes could face tough sailing. Blue-state Democrats would have every reason to protect the state and local tax deductions, which make the high tax rates of states like California and New York more politically palatable.
But it’s also true that these deductions are worth far more to the wealthy, who are not currently in good odor with Democrats. The 1 percent and other top earners, after all, are far more likely to purchase expensive homes — and, as a result, to pay high property taxes. (Indeed, in high-income New York suburbs, property-tax bills can top $100,000 — more than the cost of a home in other parts of the country.) Thus, the possibility of bipartisan support for limits on such deductions can’t be ruled out.
Democratic tax plans could also positively influence blue-state giving. Both Hillary Clinton and President Obama have proposed measures to increase taxes on capital gains. But President Obama, in a plan that would change the way inherited assets are valued when they are sold, has carved out an exception for those donated to charity. While Ms. Clinton hasn’t weighed in on that proposal yet, if she follows the president’s lead, it could encourage giving by blue-state donors, who are often clustered in the financial-services industry and apt to realize capital gains. According to IRS data, some 39 percent of New York taxpayers and 27 percent of California taxpayers, for instance, report capital gains, compared with just 13 percent of those in Alabama.
Of course, the impact of tax policy on charitable giving would be an overly narrow basis on which to judge a candidate’s plan. The tax system’s effect on economic growth and the nation’s debt and deficit must be central to any thoughtful discussion. But any deal that combines growth with an increase in charitable giving would have to be considered a very good one.
This piece originally appeared in The Chronicle of Philanthropy