By David Gordon, Associate Editor
As the Republican majorities in the U.S. Senate and House brought their income tax code reform to a vote and approved the sweeping revision, concerns emerged as to the legislation’s eventual impact on charitable giving nationwide and here in the Chippewa Valley.
The answers range from the positive – increased giving – to perhaps as much as a $95 billion drop in donations nationally. In the Chippewa Valley, estimates prepared by United Way project a decrease of more than $3 million a year in donations to support local nonprofit organizations.
The new tax code contains an increased standard deduction, which will encourage many taxpayers to use it – rather than itemizing deductions – to reduce their taxable income. Critics of this approach fear that taxpayers using the new, larger standard deduction will have less incentive to make charitable contributions since those will no longer reduce their final tax payments,
Supporters of the provision argue that people whose taxes are reduced under the new provisions will have more money available to support nonprofit organizations of their choice. Whether they actually will do so is the question. . . possibly the $64 billion (or larger) question.
The estimate of a possible $95 billion decrease in donations came from Congress’ Joint Committee on Taxation, generally regarded as providing the least partisan projections of the fiscal effects of legislation. A recent estimate from that group said the number of taxpayers deducting charitable contributions could drop from 41 million to 9.4 million with a doubling of the standard deduction.
Local Estimates Vary on Decrease
Locally, two heads of major nonprofit organizations were uncertain but wary of how the legislation could affect them. Kimera Way, executive director of the University of Wisconsin-Eau Claire Foundation, mentioned the lack of definitive information about the many changes in the tax code, along with her belief that tax deductions are not the only reason for charitable giving.
“Any time there is change in something so substantial as the tax code, that creates uncertainty in charitable giving planning for people,” Way wrote in an email. “Fortunately, most people do not base their giving solely on tax reasons.
“Our donors have tremendous charitable intent, which will sustain private support regardless of what happens with reform. That said, the changes in estate taxes and other elements of the bill will have an impact,” she added.
“We won’t know the full impact until non-profits’ budgets are affected – hopefully, it won’t be too late to help them.”
Jan Porath, executive director of United Way of the Greater Chippewa Valley, was more pessimistic about what may result from the major increase in the standard deduction, even though figures that she provided suggested “only” $13 billion would be lost in private charitable donations.
“That is a 5% decrease in overall giving, but the losses will be concentrated in faith-based, basic needs, and disaster relief charities that rely on gifts from middle class donors,” she wrote in an email.
Wisconsin Taxpayers Contributed Nearly $3 Billion
She noted that Wisconsin taxpayers claimed more than $2.9 billion in charitable deductions in the 2015 tax year and that a 5% decrease under the new tax code would reduce that by over $147 million.
“Our tight budgets mean lost dollars translate directly to reduced services for our communities,” she said.
In Chippewa and Eau Claire counties, 16,590 taxpayers claimed charitable deductions totaling just over $64 million in the 2015 tax year, Porath noted.
“A 5% loss resulting from tax reform would mean $3,203,000 less to fund private food pantries, homeless and domestic violence shelters, free medical clinics, youth serving programs and others,” she said.
She echoed Way’s comment that people donate for many reasons. But Porath said there is empirical evidence that, overall, “tax incentives significantly increase giving from people at all income levels.
“Arguments that tax reform will result in increased giving, absent a charitable deduction, are not supported by any economic data or our experience in the charitable sector,” Porath said.
Edward Young, who chaired the UW-EC Economics department before his retirement, agreed with Way and Porath.
“It seem pretty clear that raising the standard deduction will mean that fewer people will itemize,” he wrote in an email. “If you do not itemize, it eliminates the tax advantage of charitable giving.
“Of course, some altruistic people will continue with their charitable giving even though there would not be a tax benefit,” he added.
Another National View
On the national scene, Jamie Tucker of Independent Sector was somewhat less pessimistic than the Joint Committee on Taxation regarding the potential decrease in private donations. Tucker’s organization represents national charities ranging from The American Red Cross to the Salvation Army to United Way.
He said, in a CQ RollCall podcast, that the GOP tax bill could reduce charitable giving by somewhere between $12 and $20 billion and force charities to lay off thousands of employees if it doubles the standard deduction.
While many people give altruistically, the lure of getting some of their donation back in the form of a larger tax refund encourages larger gifts in many cases, Tucker said.