Taxes and Charitable Giving
April 2009
Much of the nonprofit talk in Washington, D.C. over the past few weeks has centered on the administration’s proposal to reduce the maximum deduction on charitable gifts. At a time when the economy’s stresses and strains are showing everywhere, a change in the tax code will add new challenges to the pressures already being felt by the non-profit sector.
Changes in the tax code and charitable deductions do affect giving. Donors give because they believe an organization can achieve an important result that is aligned with the donor’s values and priorities. If you ask donors why they give, studies show that tax considerations are well down on the list. But if you study the data, as the Center on Philanthropy has, you learn that even though donors give from the heart, there is still a clear correlation between giving and the tax code.
The Center’s research shows that in 2006—the most recent year for which data are available—the combined effect of lowering the charitable tax deduction rate from 35 to 28 percent and increasing personal income tax rates for taxpayers with incomes above $250,000 would have been to reduce charitable giving by 4.8 percent, or $3.87 billion. For all households, the reduction in total itemized giving would be 2.1 percent.
The Center’s research also shows that the 4 million returns from taxpayers with adjusted gross incomes of $200,000 or more account for 2.9 percent of all tax returns in 2006, but 43.5 percent, or $81.26 billion, of the $186.65 in total itemized charitable gift deductions claimed on individual tax returns in that year.
The Center on Philanthropy has made its data and research broadly available, and fielded numerous media inquiries; its newsletter goes to nonprofits nationwide. The information the Center has provided will inform the ongoing debate on national policy.
Changes in personal income and wealth have a greater impact on giving than do tax rate changes. Both have declined in the last year. According to the Center, a one hundred point change in the Standard & Poor's 500 Index is associated with a $1.85 billion change in itemized charitable deductions. The Center on Philanthropy estimated that if the Standard & Poor’s 500 Index ended 2009 at about where it was on December 16, 2008, the historical relationship between the stock market and individual itemized deductions for giving suggests that we would see a decrease of almost 5 percent in itemized charitable deductions claimed for 2008 (in current dollars).
About 70 percent of donors do not itemize their giving. Giving is discretionary, and those non-itemizers who are feeling the economic crunch may reduce their giving as well.
On top of all this, higher income households are the ones that give disproportionately to higher education.
As we know, however, President Obama is dealing with economic conditions the likes of which no one has seen for decades. And there are many worthy priorities competing for the nation’s attention. In his recent press conference, the President stated that the “most important thing [he] can do for charitable giving is to fix the economy.” A boost to the S&P Index and to personal income would certainly be a boon to the nonprofit sector.
Whatever the outcome of the budget and tax code debates, I know that the economy and the nonprofit sector will survive this downturn and emerge stronger than ever, as has happened after every previous downturn, including the Great Depression. Our human impulse to make the future better than the present guarantees it.
Cordially,
Eugene R. Tempel
President
Indiana University Foundation
