By Brian Faler
February 9, 2018
Republicans have long sung the praises of charities, but groups including Catholic Charities USA, the United Way, the Jewish Federations of North America and the YMCA are worried the GOP's new tax law will cost them big.
As part of their bid to simplify the code, Republicans nearly doubled the size of the standard deduction, which means fewer people will bother itemizing their deductions — including a century-old break for charitable contributions.
The number of taxpayers taking the charitable deduction is projected to fall by more than 28 million, according to new figures by the official Joint Committee on Taxation. The decline will be especially steep among the middle class, with claims by those earning between $50,000 and $200,000 plummeting by 61 percent.
That amounts to a landmark change to a break long considered sacrosanct in Congress, one that will leave the deduction increasingly reserved for high earners. It has charities that rely on middle- and upper-middle-class donors, and which have long used the break as a selling point, anxious about how they’re going to navigate the new landscape.
“That’s a topic of conversation that not only the Y is having, but I suppose every nonprofit is having,” said Neal Denton, chief government affairs officer for the YMCA. “For the nonprofit community, this first year of living under this new construct is going to be a different game.”
Charities say it could have potentially far-flung consequences.
Many fear a decline in giving because, for millions, the effective cost of contributing will rise. That’s particularly worrisome to groups like the United Way that depend on middle-income donors. (Universities, hospitals and arts and cultural groups are less vulnerable, experts say, because they tend to rely more on contributions by the rich.)
More charities will be forced to appeal to the well-to-do, some predict, and the sector could end up increasingly reflecting the preferences of the rich. Others worry about the long-term political viability of a break that’s mostly available only to top earners.
“If only 15 percent of Americans are getting this benefit, it gets harder and harder to justify charitable giving as a deduction,” said Lucas Swanepoel, vice president of social policy at Catholic Charities USA.
Republicans have long emphasized the importance of charities, sometimes pointing to them to justify cuts in federal welfare spending, but that collided with their promises to make tax filing easier for average Americans.
Historically, about one-third of taxpayers itemize, including a majority of people earning more than $75,000. It's long been correlated with homeownership because, when the standard deduction was smaller, the combination of mortgage interest and property tax write-offs was often enough to push people to start tracking deductions.
But the new law pushes the standard deduction to $24,000 for couples, and it will be hard to reach that threshold because the law also caps the state and local tax deduction — one of the three biggest itemized deductions — at $10,000. Most people’s mortgage interest and charitable contributions — the other major itemized deductions — aren’t big enough to get them over that $24,000 hump.
Just 13 percent of taxpayers will continue to itemize, JCT said in a report Wednesday, down from about 31 percent last year.
The number of people taking the charitable deduction will fall at every income level, though the biggest declines will come among those in the middle of the income spectrum. Ten percent of those taking home between $75,000 and $100,000 will claim the break, according to the independent Tax Policy Center, compared with 77 percent of those earning more than $1 million.
The new law also left untouched provisions in the code allowing people the equivalent of an above-the-line deduction for contributions directed from their retirement accounts, which means many older, wealthier people can get a break for their charitable gifts even if they don’t itemize.
The increased slant toward giving by the rich worries some. It means that for someone in the highest income tax bracket — now 37 percent — the government will effectively chip in 37 cents for every dollar donated by the wealthy, but nothing for gifts by the average person unless he or she has an unusually large number of deductions.
“That’s just a really weird dynamic that we haven’t seen before,” said Roger Colinvaux, a former JCT expert on nonprofits who now teaches at Catholic University’s law school. “What is it saying as a federal policy on charitable giving that the only gifts we’re going to encourage or incentivize are gifts by the wealthy?”
Overall contributions will fall by between 1.7 percent and 4.6 percent, according to a study by Indiana University’s Lilly Family School of Philanthropy, which translates to billions less annually.
Currently, of course, not everyone who contributes to charity gets a deduction — if you throw $20 into a church plate or a Salvation Army kettle, you likely aren’t going to get a tax break for it. But Giving USA figures people who itemize their gifts contribute about 80 percent of all donations.
Charities, who’ve long relied on December giving campaigns timed around the end of the tax year, are now trying to figure out how to adapt.
“There are folks within all of these organizations spending an awful lot of time talking about what is the best marketing approach to capture the attention of these donors and engage them to continue to contribute even if there may not be the same kind of tax benefits,” Denton said.
Many groups will de-emphasize the deduction in favor of explaining to donors, in much greater detail, what difference their gifts make.
“We’re really focusing on showing donors the impact that their donations are having,” said Steve Taylor, senior vice president and counsel for public policy at United Way.
Many charities will also increasingly focus on the rich, he predicts. “It would be malpractice for a charity not to,” he said.
For their part, donors may give less or they may only contribute every few years, bunching up their contributions so they have enough to qualify for the deduction.
Charities may find they will face more competition for donations from other groups. Once people realize they’re never going to qualify for the deduction, said Colinvaux, they may not care whether a group is a 501(c)3, the main type of organization for which contributors can claim a deduction, or not.
So instead of giving to a traditional charity, they might give to, say, The New York Times or their local parent-teacher association.
“The market for gifts will shift,” Colinvaux predicts. “There’s going to be a whole portion of the public that, now, it’s irrelevant whether someone is a 501(c)3.”
Charities, meanwhile, are urging lawmakers to create a new charitable deduction for people who don’t itemize. Republican Study Chairman Mark Walker (R-N.C.) has introduced legislation in the House allowing a “universal deduction,” while James Lankford (R-Okla.) has a companion bill in the Senate, though both would be expensive, costing well over $100 billion.
Not everyone believes the changes will be such a big deal.
People will continue to give regardless of the breaks, because they believe in a cause, said Dean Zerbe, a former Republican tax aide. What’s more, the economic benefits of the overall Republican plan will leave donors with more money to give, offsetting the loss of the deduction.
“They’re not factoring how much economic growth matters to charitable giving,” he said. “You have a robust economy, you’re going to have more giving. They’re living in a blindered world that’s not taking that into account.”
Many say it’s too early to know exactly what the changes will mean.
Aside from uncertainty about the economy and stock market, there is no agreement among experts on exactly how much charitable giving turns on the deduction. Many donors may not even realize they are basically ineligible for the break until next year, when they do their taxes.
The new law has been a boon to many charities so far as donors raced late last year to contribute before the tax changes took effect on Jan. 1. It could be awhile before the implications become clear, said the YMCA’s Denton.
“So far, we’re not sure,” he said. “What’s the impact going to be? We’re going to find out.”