The recently released Republican tax plan would double the standard deduction for American taxpayers. This has charities quaking in their boots.
The proposal would increase the standard deduction—the amount of household income that is not taxable if no other deductions are taken—from $12,700 to $24,000 for a couple, and from $6,350 to $12,000 for individuals. For many Americans, it is the most important practical change in the plan.
Although taxpayers don’t have to take the standard deduction, about 70% of US households choose to do so. The majority of households opt for the standard deduction because it is usually significantly larger than the deduction they would receive from itemizing—cobbling together the amounts they would get from all the other federal deductions.
The most important deductions itemizers use are those for state and local taxes, mortgage interest, and charitable contributions. For richer households, who are more likely to have expensive houses, big local tax bills and give lots to charity, itemizing is more common. Over 80% of households who make $100,000 itemize compared to less than 20% for those that make less than $50,000.
The higher standard deduction proposed by the Republicans would mean many fewer Americans would itemize. The independent Tax Policy Center estimates that of the 45 million households likely to have itemized in 2017, only about seven million—most of them wealthy—would do so under the new law.
This is a big deal for nonprofits who rely on donations. The deduction for contributions means households that itemize have much more financial incentive to donate additional money than those who don’t (and also have more motivation to buy a bigger house, but that is another story). For a non-itemizer, $100 dollars given to charity has no impact on their taxes, but for an itemizer who makes around $100,000, the government essentially gives them back $25 for every additional $100 they donate. So instead of the contribution costing that household $100, it really cost only $75.
Charities, understandably, do not like the idea of removing this incentive. According to Giving USA, US households gave about $282 billion to charity in 2016—most of which goes to churches, schools, hospitals, and shelters. An Indiana University study, funded by the nonprofit sector, found that the higher standard deduction could mean $12-13 billion less (pdf) in annual giving.
The Alliance for Charitable Reform, which promotes the interests of the nonprofit sector, is lobbying to have the tax plan amended. They would like the charitable deduction to gain a special status as a “universal deduction” that can be claimed on top of the standard deduction, even by those who don’t itemize. It would cost the US government billions in revenue, but would certainly increase charitable giving.
The Republican congressman Mark Walker has already introduced legislation to make the universal charitable deduction happen, and the Washington Examiner reports that the United Way, the US’s largest charity, told its members to call their representatives to support the bill.
Whether you think a universal deduction for charity is a good idea can come down to your views about the effectiveness of the charitable sector, and how you think the lost government revenue would actually be used.
Rather than giving itemizers back some of their taxes for giving to charity, it would be more efficient to use that money to increase tax credits that directly help the poor, like the earned-income tax credit and the child tax credit. But if the increased government revenue is used to reduce corporate rates that mostly help the rich, as they essentially would be in the Republican tax plan, than a universal deduction for charity is the better option.