Back in 2011, when Republicans still talked about deficits, a bipartisan budget commission proposed to save tens of billions a year by revamping the charitable deduction for federal income taxes.
The plan was to substitute a 12 percent tax credit available only to those who gave more than 2 percent of their adjusted gross income. The precise numbers were subject to fine-tuning, but the framework set three goals: lower the deficit, put middle-class donors on more equal footing with the wealthy and establish some minimum standard for generosity to qualify for a tax benefit.
This being Washington, the idea went nowhere. But what’s surprising now is how far Republicans are taking the country in the very opposite direction.
For the first time in their lives, millions of middle-class donors will be effectively shut out from claiming any charitable deduction under the GOP’s new tax law. At the same time, the will get a still larger share of the tax benefit, even when sacrificing a smaller share of their income.
Indeed, the few concessions by tax writers to promote charitable giving are aimed at the very high end of the income scale. The end result is a law that does more to promote gifts to pay for a grandchild’s private schooling than it does to encourage the same grandparents to go outside their family and give to the local Boys & Girls Club.
The unprecedented partisanship of the tax debate in Congress was remarkable in itself. But the negative impact on charitable giving touches something deeper in the American character.
Shared sacrifice by private citizens to complement a limited government is a precious value for this nation as a participatory democracy. But what’s happened here instead is a tax bill that tears at this fabric by denying so many households an important incentive to engage and give more to their communities.
“This is the one deduction that inures to the benefit of community and not the individual,” said Dan Cardinali, the 52-year-old president of the Independent Sector, a Washington-based coalition of charitable organizations, foundations and corporate giving programs. “What was so obviously disturbing to us with that lens — tax policy is supposed to be helping a healthy democracy — this new bill effectively limits the incentive to just the wealthy.”
Newly published data from the nonprofit Tax Policy Center help to illustrate this point. And to better understand the numbers, POLITICO did its own review of the most recent Internal Revenue Service tables for how taxpayers itemized their returns in the 2015 tax year.
Among households in the $75,000 to $100,000 income range, the TPC’s tax model projects that just 10.2 percent will still benefit from charitable deduction under the new law — down from 27.1 percent. For those from $100,000 to $200,000, the drop is from 50.7 percent to 19.6 percent.
Together that constitutes a 62 percent drop in the number of these middle-class households benefiting from the charitable deduction — households that typically give a greater percentage of their adjusted gross income than some wealthier brackets.
By comparison, among those earning over $1 million a year, more than three-quarters, or 77.6 percent, will still benefit from the charitable tax deduction and their already disproportionate share of the after-tax dollar benefit will go up.
For charities, the fallout from the tax bill amounts to a one-two punch.
First, among those who most depend on middle-class donors, there is a real fear that receipts will drop since fewer families will find it practical to claim the charitable deduction.
Many households will surely continue to donate some portion of their income. But without the deduction, the economic “price” for giving goes up. And there is significant empirical evidence —outlined in a May 2017 report by the staff at the Indiana University Lilly Family School of Philanthropy — that that this will dampen future donations both for religious and secular groups.
Republicans counter that any such loss will be offset by the fact that families will have more cash in their pockets to contribute after the promised tax cuts. Emily Schillinger, a spokeswoman for House Ways and Means Committee Chairman Kevin Brady (R-Texas) put it this way: “Chairman Brady believes that the biggest encourager of charitable contributions is a strong economy. The Tax Cuts and Jobs Act allows people to give more of their own money to spend and contribute as they wish.”
In truth, it may take years before the full impact on receipts is clear. But the second, great concern for charities is immediate and one that can’t be disputed.
That is the fact, shown in the TPC numbers, that the tax bill skews the charitable deduction even more toward the rich and away from the great majority of American taxpayers.
This is what most troubles Cardinali, a veteran community organizer. And it goes against values that Republicans in Congress have long embraced themselves.
In the bitter Farm Bill debate a few years back, for example, the same conservatives wanting to cut food stamps often spoke of their contributions and volunteer work at local food banks. One of the leading Republican tax writers in Congress, Senate Finance Committee Chairman Orrin Hatch, hails from Utah, which stands out for its level of private giving driven by traditions of the Mormon Church.
But in the partisan rush toward passage of the tax bill, the GOP appeared to make one decision after another without a full debate first on the combined consequences for charitable giving.
Urged on by the House, the Senate went along with proposals to expand the standard deduction and do away with the old system of personal exemptions.
The new standard deduction for joint filers will be $24,000, for example, double the prior level. The true increased benefit for households is considerably less — given the loss of the personal exemptions. But Republicans saw this as an important first step nonetheless toward their stated goal of simplifying the tax goal.
Anticipating this fight, charities warned that expanding the standard deduction by so much will hurt their contributions by reducing the numbers of households who itemize. But in their early spadework, the same groups did not anticipate the next big change: the Republican decision to impose a new $10,000 cap on any itemized deduction for state and local taxes.
“It wasn’t really in our calculus,” said Cardinali. But the consequences were huge.
The cap on state and local tax deductions is a direct hit on high-tax Democratic states like New York, New Jersey and California. For this reason, most of the discussion has focused of what critics say was a partisan ploy to help pay for corporate tax cuts.
But when coupled with the increased standard deduction, the new cap also greatly intensified the dynamics around charitable giving.
Together they created a $14,000 gap that families must be able to bridge before it makes sense to itemize and gain full access to the charitable deduction.
Those with large interest deductions for their home mortgages will find that easier. But when POLITICO went back and looked at Internal Revenue Service data for the 2015 tax year, the numbers show it is an uphill path for households earning less than $200,000.
For itemized returns in the $75,000 to $100,000 range, the average mortgage interest deduction was about $7,557. Among those between $100,000 and $200,000, the average was just under $9,000. Only in the $200,000 to $500,000 income bracket does it jump to almost $13,000 — closing the gap on $14,000.
For sure, these numbers are only rough averages, meaning many households could yet claim a higher itemized interest deduction. But it’s equally true that many will have even less. Not to mention the fact that before the cap on state and local tax deductions, at least a million tax returns qualified to itemize charitable cash donations — without taking any deduction for mortgage interest.
Consider, for example, a married couple earning $140,000 a year. They are old enough to have paid down their mortgage and accustomed to giving $8,000 to $9,000 a year to charity.
With their state and local tax deduction capped at $10,000, those donations would no longer qualify for any tax break. In fact the couple would have to increase their giving to $14,000 — 10 percent of their adjusted gross income — before getting any tax benefit.
That’s five times the 2 percent threshold suggested in the 2011 bipartisan proposal and unlikely to happen.
But the same couple could then look at other options afforded under the new tax bill. And this is where the $14,000 number has a familiar ring.
That’s because $14,000 also shows up in the federal gift exclusion rules that govern transfers of wealth between generations of a family. A grandparent can make a tax-free $14,000 contribution to a grandchild’s 529 education plan, and the new tax law allows that money to be used for not just college but also private schooling.
No penalty for the gift. No tax benefit if the same couple gave $14,000 to charities to help the larger community. In the eyes of Congress and the new tax code, it’s all neutral.
Certainly, it adds new meaning to the old saying: “Charity begins at home.”