White House Tax Plan Would Be Grinch For Blue State Charity
‘Tis the season for charitable giving, both because of the holiday spirit and the scramble for tax deductible donations before year’s end. Americans are the most generous people on earth and the $300 billion-plus in U.S. charitable giving swamps European nations, both in magnitude and percentage of the economy. But America’s wealthiest households—whether because of their generosity or the fact that they can use the charitable tax deduction more than those who don’t itemize their tax returns, are responsible for a significant portion of overall charitable giving; itemizers, for instance, are responsible for 59 percent of all household giving. More specifically, wealthy donors come disproportionately from liberal “blue states,” where both income and property tax rates are higher—and thus the charitable tax deduction provides an extra incentive to give.
But despite the fact that large blue states like New York and California overwhelmingly voted for Barack Obama, a White House tax proposal that would sharply limit the value of the charitable tax deduction could effectively target nonprofits in such states; it could mean that, by this time next year, charitable giving in these and other blue states may drop. As I spell out in a forthcoming paper for the Manhattan Institute, this would jeopardize the income of some of the nation’s leading universities, hospitals and museums, a great many of which are headquartered in New York and California.
Here’s why.
This year, as it has every year since taking office, the Obama White House has proposed to cap the value of the charitable tax deduction at 28 percent of the contribution made—even for those whose top marginal tax rate has gone up (since this past January) to 39.6 percent. The new top tax rate means that the most affluent households will be paying more in taxes and have less disposable income for charitable donations, while the proposed deduction cap hurts the marginal incentive to give. With the proposed plan, instead of reducing their tax burdens by 39.6 cents on a dollar by giving to non-profit groups and foundations—as they can now—they’d only see a 28 cent per dollar tax break for such giving. Think of it as an increased price on charitable giving.
For the White House, this is part of its push to have the wealthy pay their “fair share” in taxes, notwithstanding the fact that the wealthiest five percent already pay 58.7% of all federal income taxes.
But the wealthiest also give disproportionately to charity. As the Center on Philanthropy at Indiana University has reported, some 95 percent of high net worth households—those reporting earnings of more than $200,000 annually—make charitable donations, compared to just 65 percent of the population at large.
One would expect then, that any reduction in the incentive for the wealthy to reduce their taxes by giving to charity would have a significant impact on overall donations. In an important paper published earlier this month, Arthur Brooks, president of the American Enterprise Institute, found that the Obama “28 percent” solution—which, it should be noted, would apply to all tax deductions, not just charitable giving—could reduce overall donations by as much as $9.4 billion, or 4.5 percent of the $211 billion in overall household giving.
But the impact would not likely be felt equally in all parts of the United States. That’s because so many of high net worth households who itemize their tax deductions—and make use of the charitable deduction, along with other deductions to compensate for their high tax brackets—live in northeastern, mid-Atlantic, Great Lakes states, or California. Indeed, some 35 percent of all high net worth tax filers—those earning more than $200,000 a year—live in the Northeast states or California.
Capping the value of their tax deductions means they will have less to give to charity—and less reason to give to charity. As Williams College economist Jon Bakija puts it: “charitable giving decisions are responsive to incentives.” This is no mere hypothetical. The Obama proposal could be considered in the coming months by the tax reform caucus being led by Senator Max Baucus (D-Montana) chair of the Senate Finance Committee, and Rep. Dave Camp (R-Michigan), chair of the House Ways and Means Committee, who have said they considered everything on the table to simplify the tax code.
If blue state donors would be hit, it stands to reason that so would blue state not-for-profit organizations—including universities, hospitals and museum—that rely on philanthropic support. It is difficult to say with certainty that organizations with national reputations that are headquartered in New York or California rely disproportionately on donors in their regions—but there’s good reason to think so. Columbia University, for instance, reports that 58 percent of individual donors to the university and its medical center live in New York, New Jersey and Connecticut, including 42 percent from New York alone. Indeed, education would likely be particularly hard hit; Indiana University’s Center on Philanthropy reports it’s the favorite cause of high net worth donors. But the effect would be diverse. The Central Park Conservancy, which maintains the most famous park in the United States, reports that 85 percent of its contributions come from the same “tri-state area” of New York, New Jersey and Connecticut.
This piece originally appeared in Forbes
This piece originally appeared in Forbes