As Coloradans head to the polls, they face a ballot measure that would cap itemized deductions. This would harm state charities by decreasing giving.
Coloradans are beginning to cast their mid-term election votes with a concerning initiative included on their state ballots. “Proposition FF” asks whether a stricter cap should be imposed on the charitable deduction and other itemized deductions to fund a new universal meal program for K-12 students.
If passed, this measure would lead to significant declines in charitable contributions. As a result, the work of many charities throughout Colorado—including those that provide services to children—would suffer.
WHAT IS THE SITUATION?
Last year, Colorado Governor Jared Polis signed House Bill 21-1311, Colorado’s first law capping the total amount of federal-style deductions taxpayers may claim on their state income tax returns. Starting this year, this new law caps the itemized deductions of taxpayers with federal adjusted gross income (AGI) of $400,000 or more at $60,000 for married couples and $30,000 for individuals.
This existing cap on itemized deductions will create financial problems for many of Colorado’s charities that have higher-income donors. In fact, the Colorado Nonprofit Association estimated this cap would reduce giving to Colorado charities by up to $96 million.
In a move that is potentially more damaging, this May the Colorado General Assembly voted largely along partisan lines to place Proposition FF on the November ballot. By lowering the deduction cap’s income threshold to include taxpayers with federal AGI of $300,000 or more, Proposition FF would significantly increase the number of Coloradans to whom it applies.
The ballot measure also would lower the existing cap by 60 percent for individuals and by close to 75 percent for married couples. If it passes, the cap on itemized deductions for individual Coloradans having federal AGI of $300,000 or more would be lowered to just $12,000.
Inexplicably, the proposed law would disfavor married couples. Their cap would no longer be twice the cap for individuals but would instead be decreased to just $16,000.
WHAT IS THE RISK?
If passed, however, this cap would substantially reduce charitable donations, including donations to innumerable faith-based and other charities that support child welfare, education, the homeless, and other vital needs in every Colorado community.
A bill like this could have ramifications beyond Colorado’s borders. It’s not just the Centennial State that is struggling to balance greatly expanded budgets. Policymakers looking for revenue sources to fill state coffers all across the country would likely see Proposition FF as a sign that they, too, can cap charitable deductions to generate new tax revenue to fund various programs.
This also isn’t the first time Americans have wrestled over a terrible idea like capping the charitable deduction. In 2011, Hawaii enacted a similar deductions cap, and the concerns proved prophetic. Hawaiians, like Coloradans today, worried about an anticipated decline in giving. When this decline happened, Hawaii promptly reversed the policy.
The Hawaii cap was projected to increase state revenues by $12 million. The expectation among charitable leaders, however, was that giving could decline by $50 million or $60 million. The very next year, Hawaii’s legislature repealed the cap.
One would hope that Colorado’s voters (if not its legislators) would learn from the example in Hawaii, rather than marching down the same path—and paving the way for other ill-conceived imitations.
WHY WOULD THE CAP DECREASE GIVING?
While most donors do not decide to give based solely on tax considerations, such considerations are by no means irrelevant to giving decisions. Many taxpayers decide when, how much, and to which charities they will give based in part on whether a charitable deduction is available.
In short, tax incentives exist because they work! Not only does the charitable deduction recognize that money one gives away should not be categorized as income to be taxed, but it also is the only tax deduction that provides no net financial benefit. Regardless of which tax bracket donors are in, when they give a dollar, they end up with less money in their pockets than they had before they gave. Instead, the charitable deduction encourages generous behavior that Americans of all political persuasions have long recognized produces a net good for society.
Unfortunately, Proposition FF does the opposite. It discourages some Coloradans from giving away more money than they otherwise would by placing limits on how much, if any, income they can donate to charity without being taxed on what they give away.
To illustrate the problematic nature of this ballot measure, we need look no further than successful and failed efforts at the federal level. In the success column, the universal charitable deduction successfully generated more giving of small gifts in 2020 and 2021 by extending the deduction in those years to taxpayers who do not itemize. Both Democratic and Republican federal lawmakers recognized the value of encouraging taxpayers to give more to charity—especially in a time of crisis and recovery.
In the failure column, we have the itemized deduction cap that was repeatedly proposed by President Obama. This proposal was immediately and almost uniformly opposed by the charitable sector given the deleterious effect it would have on giving. Fortunately, this proposal never gained momentum among members of either party in Congress.
The Colorado legislature may not have intended to create laws to reduce charitable giving. Nevertheless, a large body of related research indicates that taxpayers subject to these deduction caps will rethink and—overall—reduce the amount of their giving to life-changing charities in every Colorado community.
Providing free meals to all public-school students, regardless of household income, may be a laudable goal. But siphoning money from charities throughout the state—including many charities that help provide for homeless and other needy Colorado children—cannot be the right way to pay for such a program.