With healthcare reform hung up in the Senate, Congress and the Trump administration are apparently shifting their primary legislative focus to tax reform. Without modifications, however, Republicans’ leading tax-reform proposals are likely to reduce charitable donations by over $13 billion annually. One hopeful sign is that senior officials now recognize this looming problem. But even though the charitable sector is in broad agreement on a straightforward solution, it remains far from clear that those leading the charge on tax reform have decided to adopt this solution.
After weeks of talks, the so-called Big 6 – top leaders from the House, Senate, Treasury Department, and White House – released a joint statement at the end of July summarizing their views. They agreed to take the border adjustment tax (BAT) – which had been bogging down negotiations for months – off the table. They also announced they have developed a unified vision for legislation.
Last week, President Trump used a small business event at the White House as a bully pulpit to start touting tax reform’s benefits. Further indications from recent closed-door meetings suggest that GOP officials will ramp up tax-reform advocacy late this month and introduce legislative language in early September.
Tax reform’s primary threat to charitable giving stems from the unintended consequences of two proposed changes. Doubling the standard deduction would reduce the fraction of taxpayers who itemize – and thus are incentivized by the charitable deduction – from 33 percent to 5 percent. Lowering the top marginal tax rate for individuals from 39.6 percent to 35 percent would further reduce the tax incentive to give. Both changes are part of the House leadership’s “Better Way” blueprint for tax reform and of President Trump’s proposal announced in April.
Recent research from Independent Sector and the Indiana University Lilly School of Philanthropy found these two changes would reduce charitable giving by a whopping $13.1 billion (4.6 percent) annually. Further, giving to houses of worship and other faith-based organizations would be reduced by a greater percentage (4.7 percent) than other giving (4.4 percent).
Fortunately, the new research also shows that Congress could more than offset this $13 billion loss simply by extending the benefits of the charitable deduction to all taxpayers—itemizers and non-itemizers alike. This “universal charitable deduction” is projected to increase giving by a net $5 billion over current levels.
In a recent White House tax-reform listening session with major foundations and other philanthropic leaders, Vice President Mike Pence lauded the unmatched generosity of Americans and emphasized that the administration’s objectives for tax reform and economic growth include ensuring Americans have the means to give even more.
Philanthropy Roundtable President Adam Meyerson encouraged the vice president “to make the charitable deduction universal so it is available to all Americans.” As in many recent meetings with congressional and administration officials, however, the vice president offered no assurances on this point.
Key officials are now aware of tax reform’s potential negative impact on charitable giving. It appears, though, that they are not yet prepared to take the step necessary to prevent substantial reductions in giving to houses of worship, faith-based organizations, and other charities.
It is in no one’s long-term interests for tax reform to put our nation’s smallest, most financially strapped congregations and neediest individuals at greater risk. Reliable research from two independent and widely respected organizations and the remarkable consensus in the charitable sector should serve as lodestars guiding tax-reform’s architects to extend the benefits of the charitable deduction to all taxpayers in all income brackets.
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