Paper: New tax laws could have negative impact on charitable giving, tax-exempt organizations

The Tax Cuts and Jobs Act of 2017 is intended “to revitalize our nation’s economy and deliver historic tax relief to workers, families and local job creators,” according to the legislation’s sponsors. If overall macroeconomic conditions indeed improve and people have more to give, the additional income would mitigate the potential negative impact of the act’s elimination of the charitable deduction, according to an expert at Rice University’s Baker Institute for Public Policy.

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Joyce Beebe, fellow in public finance, outlined her insights in a new issue brief, “Charitable Contributions and the Tax Cuts and Jobs Act of 2017.” The issue brief reviews the patterns of charitable contributions in the U.S. and how tax incentives may impact financial-based charitable giving, focusing on the effects of the Tax Cuts and Jobs Act of 2017 (TCJA) on tax-exempt organizations.

“If charitable contributions drop substantially after the TCJA, the relevant provisions are likely to be revisited in Congress even before the sunset of the other individual provisions in 2025,” Beebe wrote. “If this happens, proposals such as the universal deduction or credits with adjusted gross income-based limits may surface again. What would undermine the appeal of these proposals would be the looming government deficit. Given the current and projected government deficit levels, both revenue increases and spending cuts are necessary to control the deficit to a manageable level.”

The TCJA made several key changes to the charitable contribution landscape, both regarding the rules governing tax-exempt organizations themselves and regarding how the charitable contribution deduction is considered in other parts of the tax code, Beebe said. Researchers estimate that the effects of the TCJA will cut the number of households who previously itemized their charitable contributions by more than half and reduce the overall amount of charitable contributions by approximately 5 percent.

For the clauses that are favorable to the charitable contribution deduction, the TCJA increased the annual deduction limit from 50 percent of adjusted gross income to 60 percent, while keeping the deduction for contributions of appreciated property at 30 percent of adjusted gross income, Beebe said. The latter limits a taxpayer’s ability to claim a deduction for the full value of the appreciated property on which no capital gains tax has been paid, but the five-year carry-forward clause remains effective. The bill also eliminates the overall limit on itemized deductions (the “Pease limit”). “However, although high-income households are the primary beneficiaries of the additional flexibility, and who in turn would be more likely to increase charitable giving, this would be unlikely to fully offset the overall reduction in charitable contributions,” Beebe wrote.

The most relevant provisions in the TCJA that might negatively impact charitable contributions include doubling the standard deduction for individuals, imposing an endowment earnings tax on certain universities, changing the calculation of unrelated business income tax and repealing the deduction for college athletic seat license revenue, Beebe said.

“A direct consequence for doubling the standard deduction, together with the effect of a now-limited state and local tax (SALT) deduction, is that it reduces the number of taxpayers who itemize deductions,” Beebe wrote. “Because non-itemizers will not benefit from deducting their charitable contributions under the current system, households that stop making itemized deductions will no longer get a tax benefit from making charitable contributions. Reducing the individual tax rates would also mean that these charitable contribution deductions, if applicable, are worth less to taxpayers. Taxpayers would therefore be less likely to make charitable contributions, which in turn reduces the resources available for charities. Thus, although doubling the standard deduction is a welcome result in terms of tax code simplification, the potential consequence would be a negative impact on tax-exempt organizations.”

Beebe said states’ actions in response to the TCJA will be important in the coming years. “The TCJA’s limitation on SALT deductions prompted states to invoke creative measures, including applying charitable contributions as workarounds,” Beebe wrote. “Although the deductibility may be justified, this narrows the scope of charitable giving to tax-related reasons. The U.S. has a strong philanthropic culture, and people do give for reasons other than tax deductions. The most critical driver for charitable giving should involve causes that people believe in and are passionate about. Although tax deductibility is an important incentive, it is important to remember that recipients of charitable giving always benefit more than the givers.”

About Jeff Falk

Jeff Falk is associate director of national media relations in Rice University's Office of Public Affairs.