Governor Moore’s Charitable Contribution Proposal Cuts Off Noses.
In Maryland, Governor Wes Moore proposes to double the state’s standard deduction while at the same time eliminating the charitable contribution deduction altogether. That is significantly different from what happened under the Tax Cut and Jobs Act. The TCJA doubled the standard deduction but retained the charitable contribution deduction for itemizers, most of whom are very wealthy. We get indignant by any tax proposal limited to them that have all the money. Governor Moore thinks the charitable contribution deduction only benefits the wealthy, which must be true if only the wealthy itemize. Eliminating it satisfies our indignation but only the way cutting off our nose spites our face.
The only defensible rationale for maintaining a charitable contribution deduction available only to the wealthy is that it incentivizes wealthy donors to contribute to nonprofits. Those taxpayers certainly are not incentivized by a larger standard deductions. Here is a summary of Moore’s proposal from the Baltimore Sun:
Maryland Gov. Wes Moore’s proposed budget would double taxpayers’ standard deduction while eliminating charitable donations and other itemized deductions, such as mortgage interest and child care expenses. Proponents frame the idea as a simplification of the state’s tax code and note that few households actually claim itemized deductions for charitable donations. A 2023 state report showed that just under 625,000 of the roughly 3.2 million Marylanders — about 19.5% — who filed returns claimed an itemized deduction.
Moore’s senior press secretary, Carter Elliott, characterized tax breaks for charitable donations as an incentive that disproportionately benefits the wealthy because most middle-class donors do not itemize deductions. Marylanders give to charity to support their communities and the causes they care about,” Elliott said in an emailed statement. “To the extent anyone gives for tax benefits, it’s extremely wealthy households who want the far larger federal tax benefit which will continue to serve as the main incentive for those looking for potential tax benefits.”
“We know from history that eliminating itemized tax deductions significantly and negatively impacts giving to nonprofit organizations,” said Jeannie Howe, Executive Director of the Greater Baltimore Cultural Alliance. “The currently proposed change in Maryland will affect all nonprofits.”
Howe cited a July 2024 study by researchers at Indiana University and the University of Notre Dame, which showed that charitable giving dropped by $20 billion in 2018. According to the study, the drop was caused by a provision in the Tax Cuts and Jobs Act (TJCA) — President Donald Trump’s signature tax cuts passed the previous year — that changed the standard deduction for individual income taxes. “Basic theory and our empirical results suggest heterogeneous effects for taxpayers with different amounts of itemizable expenses,” the study reads.
Apparently, government brings in more revenue by increasing the standard deduction and eliminating above the line charitable contributions than it does by reducing or maintaining the standard deduction and allowing above the line contribution deductions for everyone. And a good portion of the added revenue derives from the lower costs associated with policing deductions, whether itemized or not. Standard deductions assume all taxpayers divert some portion of their income away from personal consumption as, for example, when taxpayers make charitable donations. Thus, a part of the standard deduction represents a variable though unverifiable amount transferred to charities or churches. It’s like the government saying “we’ll just take your word for it.”
Taxpayers probably have more after tax money with higher standard deductions, too. If doubling the standard deduction leaves taxpayers with more money after taxes than does expanding eligibility for itemized deductions without increasing the standard deduction, we should have expected charitable contribution deductions to increase after the TCJA. Or at least not decrease. But the studies on the federal level — like the one linked above — indicate that charitable giving decreased by approximately $20 billion after the TCJA nearly doubled the standard deduction and eliminated above the line charitable contribution deduction. Either taxpayers are pocketing the savings and reducing charitable contributions, or the studies are incorrectly extrapolating from the decrease in the number of people claiming charitable contributions. Maybe a better indicator would be total donations received before and then after the TCJA without regard to whether a taxpayer claimed a deduction.
We don’t often admit the trade-off. A higher standard deduction for fewer administratively burdensome and expensive itemized deductions. But if given a choice, I bet most taxpayers prefer a higher standard deduction than they do a variable above the line charitable contribution deduction. And it seems only fair and logical that if the law increases eligibility for the charitable contribution deduction, perhaps by making it an above the line deduction, it ought to reduce the standard deduction by whatever percentage of the standard deduction correlates to charitable donations.
I bet federal and Maryland taxpayers support a higher standard deduction more than above the line charitable contribution deductions. But I also bet that most middle class taxpayers, once we get past our schadenfreude, do not oppose keeping the charitable contribution deduction available to itemizers, even if only wealthy people itemize. How else can we incentivize wealthy taxpayers to give to charities?
Let’s not go cutting noses off.
darryll k. jones