Rep. Danny Davis (D-Ill.) has introduced legislation aimed at raising the amount of charitable giving in America by adding a new incentive at tax time, which nonprofit leaders say is more important than ever as a consequence of the recent tax reform passed in 2017.
Davis’ bill would establish a universal deduction for charitable giving, meaning that people would not have to itemize their donations to receive a tax benefit. Currently, only taxpayers who choose to itemize, instead of using the standard deduction, see tax relief connected to their charitable donations.
This bill comes on the heels of research released by United Way Worldwide that identifies troubling patterns in charitable giving. While total donations have increased in real terms and stayed relatively flat as a percentage of gross domestic product at 2.1 percent, the percentage of Americans who donated to charity dropped from 68.5 percent to 55.5 percent between 2002 and 2014.
“While overall giving has increased because of large and mega-donations to funds operated by wealth management companies and elite nonprofits like universities and hospitals, faith-based and social services charities that rely on middle- and lower-income donors have struggled to keep pace,” said Steve Taylor, vice president of public policy for United Way Worldwide, in a statement released in late February. “The fact that overall giving has increased is very deceptive. Who is giving and where they give matters a lot for a robust charitable nonprofit sector.”
The vast majority of funding to human service organizations flows from government contracts and grants. But donor funding is often the only flexible pot of money that organizations can use for critical activities such as advocacy work, innovation or transition planning.
“Regardless of the percentage of funding coming from it, donations are the heart and soul of charities,” Taylor said, in an interview with The Imprint. “And as kind of defining factor of the charitable sector, you can’t underestimate the value of allowing charities to do the work the way they believe is best.
The study also unearthed an interesting trendline about the intersection of giving and tax season. People who do not itemize their taxes give at half the rate of those who itemize. But the loss of donors since 2008 has been more pronounced among non-itemizers: a decline of 10 percentage points, as compared to 5 percentage points among itemizers.
Itemizing on tax returns is only fiscally advantageous if the cumulative deductions you are able to make exceed what the standard deduction is. That itemizers fuel so much of charitable giving reflects that it tends to come from people with enough wealth and income to make large contributions.
“A lot of wealthy givers have been in the pipeline and were once small givers,” Taylor said. “By reducing the number of small givers, we are also reducing the pipeline to some part of those wealthy people who started a giving habit at a younger age.”
The Tax Cuts and Jobs Act of 2017 made the prospect of tax relief from donations even less likely for the average donor, because it nearly doubled the standard deduction from $6,350 to $12,000. While the higher deduction means less federal income tax burden for many filers, it also made it much harder for most taxpayers to take advantage of the giving deduction.
The Independent Sector estimated that the tax reform law would lower the percentage of taxpayers who itemize from 30 percent to 5 percent.
Davis’ bill would address this by making charitable donations deductible from their reported gross income. So if a person’s gross income was $45,000, and she donated $2,000 to charity, she would pay taxes on income of $43,000.
The hope is that this would open up a tax advantage to people who were “priced out” by the doubling of the standard deduction, and draw in more non-itemizers with an incentive that applies to donations within their means.
Davis’ bill is being promoted by Leadership 18, a collective of service providers and membership organizations in the human services sector. The group is hoping to foment bipartisan support for it – in the last Congress, a similar push had the backing of Republican Reps. Mark Walker (N.C.) and Chris Smith (N.J.).
The bill was introduced in February and awaits a markup by the House Ways and Means Committee.