At the heart of the GOP tax plan is a push toward simplification that could have unintended consequences, potentially hurting charities — particularly those that depend on donations from middle-class donors.
To fulfill a long-held promise to make taxes simpler, the plan would end itemization for most Americans who use it today, by increasing the standard deduction. About 30 percent of taxpayers who file returns currently itemize — and the prospect of that change has triggered a strong behind-the-scenes campaign from charities seeking to make sure the tax incentive continues to be used.
According to an Urban-Brookings Tax Policy Center analysis of a plan with similar elements, the 45 million households that would itemize deductions under the current rules in 2017 would drop to just 7 million.
Many people who no longer itemize would continue to give, and the charitable contribution deduction would still be available to the small fraction of people who do itemize — who would tend to be higher-income households. But charitable organizations are concerned that donations will drop. More than 80 percent of itemizers reported making charitable donations, compared with 44 percent of non-itemizers, according to an analysis by Indiana University researchers commissioned by Independent Sector, a membership organization of nonprofits, foundations and corporations.
That study found that decreasing the top tax rate and increasing the standard deduction slightly less than the current proposal could cut charitable giving by up to $13.1 billion per year. That's a tiny percentage of the $373.3 billion that was donated in the United States in 2015, according to the Giving USA Foundation, but the issue has become an important one for charities.
“We have spent an enormous amount of time up on the Hill, and we get back the talking point, 'Oh, don’t worry — we preserve the charitable deduction.' That makes it seems like many lawmakers don’t understand, themselves, what the ramifications of this legislation are,” said Steven Taylor, senior vice president at United Way Worldwide. “A lot of charities are coming to grips with the fact that there may come a point where individual charities would have to start having to come out in actual opposition to the tax reform bill — and no charities want to be put in that position.”
Reducing itemization isn't just a problem for charities. The real estate industry is already in the midst of an aggressive battle against the loss of the state and local property tax deduction that they argue could harm home values.
Instead of pitching a political fight against one of the core pieces of the GOP tax plan, charities are trying to push for a universal deduction for donations — one that anyone can take, regardless of whether they itemize. Rep. Mark Walker (R-N.C.) introduced a bill proposing that idea last week.
“The charitable sector overall has not come out and said, 'Don’t do this, don’t do this, don’t do this.' The things they want to do that are going to negatively impact charitable giving are basically the core of the plan ... so I don’t think it would be a successful strategy,” said Hadar Susskind, senior vice president of government relations for the Council on Foundations, an association of philanthropic organizations and corporations. “We have a solution that we have offered.”
The end of itemization for most people would likely hit some charities more than others. About 5 percent of people will continue to itemize under the new plan, mainly higher-income people with very large mortgage interest or charitable contributions. That could disadvantage nonprofits that depend on smaller donations by middle-class families: think the local soup kitchen or the United Way, which receives 7.2 million small donations averaging $154 a year.
“One of the points of the [charitable] deduction is to foster altruism, to foster pluralism, to foster civic society,” said Roger Colinvaux, a law professor at the Catholic University of America and former legislation counsel on Congress's nonpartisan Joint Committee on Taxation. “If the deduction ends up being for the top 5 percent of taxpayers who are the wealthiest, I think you're really painting a very elitist picture of what this incentive is for. It’s only incentivizing the charitable choices of the richest, and the pluralism of the richest, and the civic groups chosen by the wealthiest.”
The importance of the tax incentive is palpable in the flurry of donations before the tax year closes at the end of December, nonprofit groups say.
“I’m a believer that philanthropy is not a financial decision; you’ve got the gene to give — it feels good, literally it's the love of humans. I get that. But if it wasn’t at least a little tied to a financial decision, then why are all of our charitable funds established at the end of the year?” said Bernie Story, president of the Lehigh Valley Community Foundation, which provides charitable funds in the third-largest metropolitan area in Pennsylvania.
The repeal of the estate tax could also hurt charities, since the tax incentivizes wealthy people to leave some of their money to nonprofits.
Despite all that is at stake, charities haven't spoken out loudly against the tax plan. In part that may be because charitable organizations are reluctant to wade into partisan debates. Nonprofits may be wary of pushing too hard on tax breaks; many depend on government grants and other funding streams. The nonprofit industry is also less coordinated and more diverse than many industries.
But even charities that seem like they might be insulated from the effect of losing a tax break are mobilizing. For example, faith-based charities are sometimes assumed to be less influenced by incentives. But Brian Walsh, executive director of the Faith and Giving Coalition, argues they may be even more vulnerable to changes to the tax code.
“Faith-based givers tend to be more generous, on average, than other givers. They are already giving generously and stretching to do so. They're more sensitive to tax policy because they're more generous,” Walsh said.
Extending the charitable deduction to more people would cost more in the end, making it even harder for lawmakers to figure out how to pay for the tax plan. The Indiana University study found that extending the deduction to people who don't currently itemize, along with the other changes in the plan, could decrease revenue by 3.8 percent.
Politically, there is also an argument to expand the deduction that will likely appeal to conservatives.
“Who gets the money ultimately depends on where individuals choose to give, instead of the government divvying up grants,” said Alan Viard, a resident scholar at the American Enterprise Institute. “Let the people decide directly, as individuals.”