The $20B Impact on Philanthropy of the 2017 Tax Cuts and Jobs Act

A study by the Lilly Family School of Philanthropy demonstrates that the 2017 changes to USA tax law have yielded a net loss of $20B in charitable giving. As they say, that’s not nothing. It is no wonder that there are strong advocates in the philanthropy sector for adjusting the tax law when it is up for renewal. These advocates call for a special deduction for charitable giving even for those who otherwise don’t itemize.? [For our non-USA readers: the 2017 changes significantly increased the “standard deduction” amount.? Those deductions include health care, home mortgages, charitable deductions, etc.? Increasing the amount to be included in the standard deduction meant that many fewer taxpayers had reason to itemize those deductions since the standard deduction would exceed what the itemized deductions would be. ?Since charitable deductions are included, it seems that there is less incentive to give than there had been when more taxpayers itemized.]

?Yet not everyone in our sector is in favor of adjustments. So before weighing in, let’s take a look at some of the results of the 2017 tax laws from the perspective of the philanthropy/charity sector and why some do and some don’t advocate changes..

?Most relevant in the study is who is in fact giving less. The study confirms what the Giving USA study showed and has been consistent with long term trends from the charitable sector. Those who seem to be giving less are middle income donors.? The proportional number of donors from the broad middle class has continued to drop along with the absolute number of dollars from this group. These facts seem pretty clear. And it does seem likely that at least some of the reduction is because of the drop in the number of people who itemized deductions as a result of the greater standard deduction, although, as we discuss below, it may not be a complete answer.

?On the surface, the argument for a carve out exception for itemizing charitable giving without reducing the standard deduction seems to make some sense. It certainly suggests that it would provide an incentive for some to increase or retore their charitable giving.

?However, it seems to me that asking about charitable giving independent of other questions is insufficient. For example, one might ask, did government support for human services and the arts and education and health care increase by a much larger amount, thereby more than offsetting the drop in charitable giving? After all, philanthropy is a crucial but only partial source of funding for all of these areas.?? If that were the case, it would weaken the case for the carve out because the net benefit to the sector and to society as a whole would have far exceeded that loss.? [I assume that the answer is no but without the analysis, the argument is incomplete.]? After all, those of us in the philanthropy sector should care about solving societal problems, not simply reinforcing our own sector.

?Another matter to consider is the increased pressure on middle earners independent of any altruistic decisions. Between the pandemic and inflation, the sector with the greatest challenge to discretionary or elective spending has been the group whose giving has dropped. Is it fair to “blame” the loss of the charitable incentive for that? What other areas have felt the cutbacks? Have people chosen to select less expensive higher education? Have they elected lower cost health plans? Have they chosen not to go on vacations? In other words, if all areas where middle income earners have choices have seen a reduction in spending, it may be more important to address a much larger set of issues, some of which can be addressed by tax reform, than arguing for the charitable deduction.

?Even within the charitable sector, it is only part of the story. It is clear that the emergence of DAFs has created a whole new set of questions that deserve serious attention.? While most DAF holders don’t storehouse money in them [i.e., taking a charitable deduction but not spending the money in the funds], enough do that it warrants attention.? And should private foundations be permitted to give money to DAFs as fulfillment of their 5% required payout? And should “recoverable grants” given by DAF funds be treated more like Program Related Investments which must be spent promptly for charitable purposes, and not restored to the DAF corpus? And is there a level of giving to or from DAFs which should trigger transparency? [As I have affirmed in prior posts, we are DAF holders; the questions are not about the legitimacy of DAFs as a vehicle, but about some of the rules governing them, especially as they have become so prevalent in the philanthropy world.]

?And, to muddy the waters further, a recently released CAF study seems to show an increase in charitable giving in the USA – and elsewhere in the world.? That may not be at odds with the Lilly study since there have been many mega gifts that can distort the averages.? Clearly the plot thickens.

?Given some of this last set of questions, it is no surprise that some want no changes whatever that would limit their autonomy and anonymity. After all, the tax changes of 2017 provided outsize benefits to the wealthiest whose proportion of societal wealth continues to grow at an historically record amount.? Their advocates/lobbyists know that once one begins to look at tax law changes, it is highly unlikely that only one adjustment to charitable deduction will be considered.

?There are other voices who have argued that the sector itself has been undergoing significant changes. In addition to DAFs and LLCs, the number of Giving Circles has mushroomed involving hands-on giving in ways that are not typically measured by tax reporting or most other studies.? Moreover, impact investments of various sorts are viewed by some as equivalent to philanthropic giving. [Whether that is or should be true is a topic for another time.] Additionally, as we learned from the lead up to the 2020 Census, the level of distrust in giving information to the government is extraordinarily high, especially among certain populations. Many refused to share their own information not trusting that it would not be used against them. It is not a leap to suspect that information about charitable giving among those populations would be kept under wraps.

?All of this is to say that our sector needs to give careful thought to the broader implications of any specific policy for which we may be inclined to advocate. But more important, give serious thought to the larger systemic questions that are crying out for our attention and for which we need be leaders. Charitable giving matters; a healthy sustainable just society matters more.

Also published as #490 on WisePhilanthropy.Institute