According to the most current estimate, Trump’s tax reform plan, which became law in December 2017, will cause a 4% decrease in annual charitable giving. That number sounds pretty benign. The key issue is that not all groups will be affected evenly
Charities received about $410 billion in contributions in 2017, with three-quarters of that coming from individual givers (foundations, bequests, and corporate gifts made up the rest, giving most heavily in that order). A new report by the American Enterprise Institute estimates that the Tax Cuts and Jobs Act will reduce individual donations by between $16.3 billion and $17.2 billion annually.
But the Tax Cuts and Jobs Act is designed to change the behavior of a particular kind of donor: primarily middle class Americans, who previously itemized their charitable deductions to receive some tax relief. The number of people doing this is expected to drop from about 47 million to around 20 million, because the tax law has nearly doubled the standardized deduction, which means that many people who itemized can use the new method to pay less federal tax.
Alex Brill, a resident fellow who co-authored the report for the right-leaning public policy research group, notes that the study addressed financials only, and not sector-level impact. That leaves one question unconsidered. As Brill puts it: “What kind of giving is undertaken by those most affected?”
The Charitable Giving Coalition, a sector advocacy group, has done its own research and suspects the answer will be “organizations doing vital work in our communities, particularly the small, local charities and congregations already being run on shoe-string budgets,” according to a warning the group released in response to the AEI report. To fix that, CGC has been lobbying Congress for a universal tax deduction that would essentially allow Americans giving beyond a certain minimum threshold to claim a tax benefit regardless of how they filed their taxes. Congress is currently considering several related bills.
Charitable donations traditionally improve society two ways: They fund cause work, and enable organizations to employ more people, leading to a healthier economy. (The nonprofit sector employs about 10% of the American workforce.)
The AEI estimate comes from an theoretical economic model that the group made by combining anonymous tax return data with research about how people value their own generosity or are likely to respond when the “price of giving” changes. Basically, tax-incentivized giving has always been a win-win for givers because they receive some financial benefit too, but Brill says that when it costs people more to make the same impact, they often reduce the amount they’re willing to spend.
That’s bad news at a time when America is struggling with serious income inequality, social justice issues, and an affordable housing crisis, along with families being disrupted by mass deportations. “There is clearly a growing consensus in the research that the new tax law will reduce giving at a time when demand for charitable programs is increasing,” adds CGC Jason Lee, chair of the Charitable Giving Coalition in a prepared statement.
At the same time, AEI analyzed different ways to rectify the situation. Brill says that a “above the line” deduction like the universal charitable concept makes sense, especially if there’s a minimum to surpass first. “The idea might be that people are likely to give a little bit anyway,” Brill says. “We want to just encourage them to give a little bit more of that sort of threshold amount.” If applied correctly, such a policy could increase giving more than the revenue being lost.