Monday Morning Silver Linings (and the Budget Reconciliation Bill)
Yes, you read the title of this post correctly. And yes, there’s a lot to unpack about the House Ways & Means Committee’s budget reconciliation bill introduced last week. In fact, I plan to focus my posts this week on various aspects of it and its potential effects on the nonprofit sector. Almost none of it is good for the nonprofits we hold dear. But because I’m yearning for some good news, I found a sliver of hope in one of its provisions. Hear me out.
When the legislation known as the Tax Cuts and Jobs Act (TCJA) of 2017 took effect, it required taxpayers to making charitable contributions to itemize (i.e., forgo the then beefed-up standard deduction) in order to reap the tax benefits associated with these contributions. This created a massive disincentive for making charitable gifts by lower- and middle-income taxpayers. In fact, evidence suggests that this change to the Code did lead to a significant decrease in the number of taxpayers claiming the charitable deduction.
Yet, some estimates of charitable giving from 2018 to 2022 indicate that total individual giving rates remained relatively stable, and indeed have met historic highs, when compared to pre-TCJA levels. How could this be the case? Well, it’s simple really. The TCJA boosted the incentive for the wealthiest taxpayers to itemize—and to make charitable gifts to increase their itemized deductions. And they did, because the TCJA simultaneously increased the limit for deducting cash contributions to charities from 50% to 60% of AGI. In other words, the TCJA shifted the distribution of tax benefits from charitable giving by giving a larger share of these benefits to higher-income earners who itemize. Bad, bad, not good.
Recent research by colleagues at IU’s Lilly Family School of Philanthropy and the University of Notre Dame both corroborates and complicates this story. Looking at 2017 and 2018 returns, their study found that about 23 million households switched from itemizing their charitable deductions in the first year to taking the standard deduction the next year. The study notes that “[a]mong the households that had previously been itemizing but switched to taking the standard deduction in 2018, the amount they gave to charity decreased by an average of $880.” Doing the math suggests that, when aggregated, the TCJA spelled a decline of about $20 billion in charitable giving, stemming from these households alone. Worse still, the researchers estimated that $16 billion of this $20 billion is a permanent annual decrease in charitable giving caused by the TCJA and is not attributable to bunching or re-timing gifts.
So, why did I find a sliver of hope when I read through the pages of the budget reconciliation bill last week? Because it seeks to reinstate a modest charitable deduction—even for taxpayers who do not elect to itemize. It creates a “temporary deduction for non-itemizing taxpayers up to $150 for single filers ($300 for married filing jointly) for charitable cash contributions for tax years 2025 through 2028.” This is not a panacea, and it likely won’t make up for $16 billion of permanent annual charitable giving lost from the lower- and middle-income taxpayers estimated in the study I referenced earlier. But it’s a step in the right direction. And don’t worry, I’m going HAM on the rest of the budget reconciliation bill (with respect to nonprofits) later this week.
Christopher J. Ryan, Jr.
Indiana University Maurer School of Law