Trump's tax law diminished incentives for charitable giving, but we can fix it

The Tax Cuts and Jobs Act of 2017 has reduced the tax incentive for charitable giving for more than 90% of Americans, leading to a decline in charitable giving and a potential risk of it becoming a luxury good.

Debate over the potential renewal of the so-called Trump tax cuts of 2017 will be building as their expiration approaches next year. The focus will likely be on corporate and personal tax rates.

But there’s a less-appreciated but consequential side effect of the Tax Cuts and Jobs Act: its impact on charitable giving. Simply put, whatever its virtues, the Trump tax package has diminished the tax incentive for such giving for more than 90 percent of Americans.

Put another way, charitable giving is at risk of becoming a luxury good.

This collateral damage stems from what is otherwise a very good idea: simplifying tax returns for most households. The 2017 tax cuts increased the standard deduction dramatically, thus reducing the number of households with any reason to itemize their tax returns. Under the revised tax code, the share of taxpayers choosing to itemize deductions dropped from an average of 30 percent to just 7.5 percent of all returns. 

Yet whatever its virtues in simplifying tax preparation, the increase in the standard deduction also curtailed the tax incentive for charitable giving. Indeed, IRS data show that only the most affluent taxpayers — those earning more than $500,000 annually — are now likely to avail themselves of itemized charitable deductions. Although itemized charitable giving still increased by 11 percent from 2017 to 2021, the average share of total adjusted gross income devoted to itemized-charitable giving fell by 28 percent.

Put another way, more income was available for charitable giving, yet a smaller percentage of it was reported for tax deductions. If the percentage had not declined, it would have meant an additional $252 billion in itemized charitable contributions between 2018 and 2021.  

There had been hope among the writers of the Trump tax bill that itemized giving would not decline as a share of income. The $10,000 cap on what had been unlimited deductions for state and local income taxes created, in theory, an incentive for high-income taxpayers to turn to the far more generous (up to 60 percent of income) charitable deduction to reduce their tax liability. This was especially true for taxpayers in such high-income “blue states” as California and New York. Yet charitable giving in New York, as a percentage of adjusted gross income, fell by 18.8 percent after the Tax Cuts and Jobs Act, and by 13.9 percent in California.

There is an important caveat to this story. The IRS data cannot, by definition, tell us about non-itemized charitable giving. The cash placed in the collection plate on Sundays or in the Salvation Army’s red buckets during the holiday season, or donated by people who take the standard deduction.

But there is reason to believe that even this informal charitable giving has declined.  Survey research data compiled by the Indiana University Lilly Family School of Philanthropy for the annual Giving USA report estimates that total charitable giving decreased in 2022, terming this “a relatively rare occurrence usually seen during years with difficult or unusual economic conditions.” The report estimates that individual household giving, including contributions not itemized on tax forms, totaled just over $319 billion in 2022. This represented a 6.4 percent decline in nominal terms (or an inflation-adjusted 13.4 percent) from the report’s estimate total for 2021.

Even if giving were to hold steady or increase, there is a danger in reserving the tax incentive for charity to the wealthiest Americans. It puts that incentive — part of the tax code since 1917 — at risk of being criticized as a loophole for the rich, for instance.

The tax code should be sending a quite different signal: that charitable giving is to be encouraged for assisting organizations who do what government cannot. Such giving is the lifeblood of civil society, of organizations that bind communities together, whether through local park conservancies or school scholarship programs, or the kinds of medical research which the National Institutes for Health shies away from (think mRNA). 

Maintaining the charitable deduction and extending it to a wider economic range of taxpayers should be part of any revision of the Tax Cuts and Jobs Act. There is a useful recent precedent. The CARES Act authorized a so-called “above-the-line” charitable deduction, available to taxpayers taking the standard deduction in 2020 and 2021.  The deduction was capped at $300 for all filers in 2020, and raised to $600 for married-joint filers in 2021.  

Charitable giving deductions claimed under this provision totaled nearly $11 billion in 2020 and $18 billion in 2021. The combined total of nearly $29 billion in non-itemized contributions was equivalent to 6 percent of the $464 billion in total contributions claimed by itemizing taxpayers across those two years.

It is true that such an extension of the tax incentive for charitable giving might lead to a (modest) increase in the budget deficit. The deduction is already the 10th largest “tax expenditure.”

But that should not obscure its much larger positive social value. It has helped to account for the U.S. being often termed the world’s most charitably generous nation. According to the Charities Aid Foundation, as of 2016, U.S. households contributed far more as a percentage of GDP (1.44 percent) to charity as the next-closest nations (New Zealand, 0.79 percent) and  (Canada, 0.77 percent). This record is part of what is rightly termed American exceptionalism—and worth defending.  

By the way, don’t expect Democrats to do anything to encourage charitably minded taxpayers.  It was Bernie Sanders who once said, “I don’t believe in charities.”

Howard Husock is a senior fellow at the American Enterprise Institute.