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Will Tax Reform Reduce Charitable Giving?

New research predicts the new tax law will reduce charitable giving by 4 percent.

The Tax Cuts and Jobs Act, which President Donald Trump signed into law late last year, made significant changes to the individual and corporate side of the tax code. Its effects, both intended and unintended, were expected to be similarly significant. Among other effects, expert have predicted the TCJA will dramatically increase the United States' debt, produce modest economic growth (in the short-term), temporarily increase the after-tax income of most Americans, increase economic inequality, increase health insurance premiums in the non-group markets, and prompt over 230,000 (mostly wealthy) business owners to take advantage of a loophole allowing them to shelter their income and save on taxes.

A new analysis from Alex Brill and Derrick Choe of the American Enterprise Institute, a conservative think tank, highlights another likely consequence of the TCJA: reduced charitable giving.

Since 1917, charitable donations have been tax-deductible, although the specifics of this tax break have changed over time. Prior to the passage of the TCJA, taxpayers who itemized could claim the deduction, up to 50 percent of adjusted gross income (AGI). In 2017, total charitable giving in the U.S. was $410 billion, of which households contributed $287 billion.

The TCJA made only one direct change to tax law around charitable giving, raising the limit on deductions to 60 percent of AGI. The law, however, made a number of other changes with the potential to reduce charitable giving—namely, doubling the standard deduction and reducing marginal tax rates for most Americans. The former will reduce the number of taxpayers who itemize and are thus eligible to claim the charitable giving deduction, while the latter reduces the tax incentives for charitable giving.

Using data from the Open Source Policy Center, Brill and Choe estimate that the TCJA will reduce charitable giving in the U.S. by $17.2 billion (or 4 percent) in 2018. The bulk of the reduction (83 percent) is driven by the TCJA's changes to the standard deduction: The researchers estimate that 27.3 million filers will stop itemizing and claim the standard deduction in 2018. The law's effects on giving are also most pronounced at higher income levels.

The results are not hugely surprising. A number of charities expressed alarm about the TCJA's changes to the standard deduction last fall, when the legislation was being debated, and several analyses projected the legislation would lead to a drop in charitable giving.

Brill and Chloe also analyze the effects of two potential reforms to boost giving—an above-the-line deduction for giving and a tax credit—and find that both would offset the declines driven by the TCJA.