By Stan Veuger and Kyle Pomerleau

Over at The Hill, our domestic policy studies colleague Howard Husock recently argued that repealing the $10,000 cap on the federal tax deduction for state and local taxes (SALT) would reduce charitable giving. His claim, as we understand it, is based on the idea that high-income taxpayers organize their lives to target a certain federal tax liability. As such, if they can deduct more dollars in property taxes (because the SALT cap has been eliminated), reducing their federal tax liability, they will then reduce or eliminate other deductible expenses, such as their charitable giving.

While the SALT cap repeal will have an impact on the
progressivity and the geographic distribution of the federal tax burden and may
have consequences for state and local public finances, there will be no adverse
risk to charitable giving. In fact, if lawmakers repeal the SALT cap,
charitable giving would likely increase.

Eliminating the SALT cap would increase charitable giving through two main channels. The first one is an income effect: Every taxpayer who currently itemizes (or becomes an itemizer after SALT cap repeal) and who is subject to the cap would receive a tax cut. In response, they would increase spending on all sorts of goods and services, including charitable giving. A reasonable estimate of the elasticity of charitable giving with respect to income based on previous empirical work is one, meaning that a 1 percent increase in income will lead to a 1 percent increase in charitable giving.

The second mechanism is a substitution effect. SALT cap repeal would decrease the after-tax price of charitable giving by increasing the share of households that itemize. The households that would become itemizers would see the cost of giving decline from $1 per dollar given away to $1 minus the household’s marginal tax rate. A reasonable estimate of this price elasticity estimate is minus one: a 1 percent decrease in the tax price increases charitable giving by 1 percent.

Both the income and substitution effects would add to charitable giving. In our estimation, full repeal of the SALT cap would, in isolation, increase after-tax income by 0.63 percent and reduce the after-tax price of charitable giving by 0.95 percent. Taken together, total charitable giving would increase, not decrease, by roughly 1.6 percent or about $5.3 billion. A similar calculation by our colleague Alex Brill of the expected impact of the Tax Cuts and Jobs Act of 2017 on charitable giving produced a remarkably precise estimate.

While we fully appreciate the importance of charitable giving, our positive estimates should not necessarily be interpreted as an endorsement of SALT cap repeal. In fact, we agree that there are strong arguments in favor of keeping or even reducing the current cap. But fear of reduced charitable giving is not among them.

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