The federal Republican tax plan would create a system detrimental to nonprofit charities. Their proposal increases the standard deduction, thereby reducing the number of filers who itemize. In other words, it limits tax benefits for many of the small to mid-size donors for charities. According to the most recent analysis by the Tax Policy Center, the number of taxpayers that would itemize compared with current law would fall by 75 percent in 2018.
So why is this reform of the tax code so bad for charities? Existing law encourages individuals to make charitable contributions by providing a deduction for amounts contributed, but the deduction is only available to individuals who itemize. If estimates are correct and 75 percent of tax filers would no longer itemize, the charitable deduction would be rendered useless to all but a small percentage of filers. In addition to eliminating the benefit to those that take the standard deduction, itemizers would also receive less of a benefit when making charitable contributions. The value of a tax deduction varies depending on one’s marginal tax rate and because the Republican tax proposal lowers the tax rate on the first $1 million to 35 percent, individuals who continue to itemize will see less of a benefit when making charitable contributions under this plan.
We know that people donate to charities because they want to support worthwhile causes. But many in the nonprofit world also know that no matter the size of the contribution, every dollar has the same worth?—?whether it comes from individuals who donate $1 million or $1 dollar. By disincentivizing itemized deductions, there is a real concern people will give less to the organizations that do the most with the least amount of resources. This could result in a big loss to charities. In fact, a recent study showed that similar tax reform changes could reduce charitable giving by as much as $13.1 billion per year.
The Republican tax plan and the goal of maintaining incentives that encourage greater charitable giving are at odds. Several proposals have attempted to make the charitable deduction more accessible and equitable to tax filers. Congress could consider allowing the charitable deduction to be taken “above-the-line” (i.e., available to both itemizers and those that take the standard deduction) or could convert the charitable deduction to a tax credit equal to a percentage of the amount donated. Both of these options would provide a benefit to any person making a charitable contribution, irrespective of how that person chooses to file. A tax credit would also make the tax benefit more equitable in that every person would receive the same benefit irrespective of income and would also not overly complicate tax filings.
Congress should rethink the serious implications this tax plan will have on charities, and more importantly, the impact this plan will have on the ability for charities to do important work in each of our communities.
Monique Limón serves Santa Barbara and Ventura counties in the California State Assembly. She also chairs the Select Committee on the Not-For-Profit Sector. Sebastian Ridley-Thomas serves South and West Los Angeles in the California Assembly. He chairs the Committee on Revenue and Taxation.