By Alex Brill and Grant M. Seiter

In 2020, Americans’ individual charitable giving reached $324 billion, a record high and a 2.2 percent increase from 2019. While the pandemic imposed great costs on our society, many households shared their resources with others, including religious, educational, and human service organizations. For many reasons, giving is a good thing and our society is better for it. Encouraging people to give is also a good and worthy objective, if done well. Unfortunately, lawmakers currently are pursuing a tax incentive for charitable giving that is poorly targeted.

In 2020 and 2021, as part of its response to the COVID-19 pandemic, the federal government allowed a capped above-the-line deduction for non-itemizing taxpayers for charitable donations up to $300 in 2020 and $300 for single filers and $600 for married couples in 2021. Typically, only taxpayers who itemize their deductions can deduct charitable contributions, but this policy covered giving by all taxpayers. Now, Senate tax writers from both parties seek to bring this expired provision back.

While well-intentioned, the temporary above-the-line charitable deduction is unwise tax policy. It is a windfall gain for all of the taxpayers who would make $300 (or $600) contributions in the absence of the deduction, and it fails to incentivize additional giving above these very low thresholds. According to the Joint Committee on Taxation, these policies cost $2.9 billion for 2021. A well-designed policy would encourage more households to give and incentivize increasing contributions for those already giving. Fortunately, this better policy only requires a simple change to the current proposal: an above-the-line deduction without a cap.

To
understand why, consider how existing tax policy relates to charitable giving. Under
current law, taxpayers who itemize are allowed a deduction for charitable
contributions from their taxable income (subject to some limitations). An additional
$1 of charitable giving lowers taxable income by $1 and saves the taxpayer an
amount equivalent to their marginal tax rate. So, those in the 24 percent tax
bracket can give an extra dollar to their favorite charity while only paying 76
cents after tax. For taxpayers claiming the standard deduction, the price of
giving $1 is $1.

A key change in the Tax Cuts and Jobs Act (TCJA) of 2017 was an increase in the size of the standard deduction. For married taxpayers filing jointly, the standard deduction in 2022 is $25,900. Before 2018, it was $12,700. As a result, the share of taxpayers who itemize their deductions — thereby enjoying an incentive for charitable giving — dropped from 31 percent to 11 percent, and charitable giving dropped by $15.5 billion in 2018 compared to its pre-TCJA predicted level.

An uncapped above-the-line deduction for charitable giving would create a giving incentive for all taxpayers and increase aggregate charitable giving by $21.5 billion. Unfortunately, the cost of this policy likely exceeds the expected increase in giving.

If the policy instead had a floor, meaning the deduction is only available on giving that exceeds a minimum amount, it would significantly reduce the fiscal cost with only a minimal impact on the boost to aggregate giving. A floor set at some average level of giving or percent of adjusted gross income would effectively encourage additional giving above what would have occurred anyway. For example, a floor of $500 for single filers and $1000 for married filers would increase giving by $19.1 billion and cost about $14.6 billion. The cost could, if desired, be offset with a reduction in the standard deduction.

As lawmakers consider making charitable tax benefits available to all taxpayers, they should focus on policy design that increases charitable contributions efficiently, not lip service to the idea.

The post Charitable giving is good. Be smart about how to encourage it appeared first on American Enterprise Institute – AEI.