Tax Law Changes -- what it means for philanthropy
Published: April 12, 2019 by Camilyn K. Leone, Esq and Michael Hicks
The Tax Cuts and Jobs Act doubled the standard deduction and cut the tax rate for the vast majority of taxpayers. This does two things immediately that are of interest. First, it reduces the tax savings from charitable donations, effectively raising the “price” of giving. Second, it increases real disposable income due to lower tax rates. Combined, economists call these the price and income effects.
An IU study by the Lilly School of Philanthropy estimated the price effects at about 4.6 percent of charitable giving. That estimate is useful, especially since there tends to be a shift between types of charities, a difference between the short-run and long-term response, and a fairly wide range of estimates of donor response to tax changes. Moreover, high-income households, who donate the most to charities, see the smallest impact on the price of donating. The IU study did a good job dealing with these issues, but altogether this means there is a great deal of uncertainty about the ultimate size of the impact.
However, depending on which assumptions are used, the tax cut passed in 2017 will also result in an increased tax savings that should result in an increase in charitable giving of between 2.5 and 4 percent. This partially offsets the price effect. But there is more to the story.
The Tax Cuts and Jobs Act does two other things worth noting. First, it should increase economic growth modestly, adding between 0.1 and 0.4 percent to the economy each year. Second, it should reduce the demand for private social services as the economy grows, and so personal income rises and the demand for labor increases.
If the tax cuts lead to this additional economic growth, that would increase disposable personal income, which should yield growth in charitable donations of between $2.2 billion and $8.8 billion.
In 2014 the IRS reported $213 billion in charitable donations, but Giving USA reported that Americans gave $358 billion that year. That means that less than 60 cents out of every dollar of charitable donations is reported to the IRS. Probably a half of all charitable deductions are unaffected by tax laws today. So, taken altogether, it appears that the Tax Cuts and Jobs Act is most likely to have no noticeable effect on charitable donations in 2018, especially for individual charities who are accustomed to large annual changes to donations.
Fundraising is still about mission and relationships. People give because they want to make a positive difference in the lives of others, not because they want an income tax deduction. With all the changes don’t be scared to continue to give and give generously to those organizations that are making a difference! It is important and appreciated.
Sources: Camilyn K. Leone, Esq – Planned Giving Tomorrow, Winter 2018 ; Michael Hicks is director of the Center for Business and Economic Research and the George and Frances Ball distinguished professor of economics in the Miller College of Business at Ball State University.
