‘Modest’ drop seen from proposed tax changes

PJ staff report | October 28, 2011

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Patrick Rooney

Proposals by the Obama administration to reduce the charitable tax deduction for wealthy households and increase the marginal income tax rates they pay would, by themselves, have a "modest negative effect" on charitable giving, a new study says.

One proposal would reduce the value of itemized charitable deductions to 28 percent in 2012 from 35 percent currently for taxpayers with an adjusted gross income over $250,000 for couples or $200,000 for individuals.

The second proposal would raise the marginal income tax rate for those taxpayers to 39.6 percent in 2013 from 35 percent currently.

The study, conducted by the Center on Philanthropy at Indiana University and sponsored by Campbell & Company, uses historical data to look at how itemized charitable giving would have been affected in 2009 and 2010 had the proposals taken effect in those years, respectively.

It finds that total itemized giving would have declined 0.4 percent the first year and 1.3 percent the second year.

"This suggests a relatively small direct impact," Patrick M. Rooney, executive director of the Center on Philanthropy, says in a statement.

But in combination with the weak economy, funding reductions and rising demand for services already affecting some nonprofits and their constituents, he says, the proposed changes "are likely to have an additional negative effect in the long term."

The study estimates total itemized giving would have declined $820 million the first year and $2.43 billion the second year, when both changes were in effect.

Among households with $200,000 or more in income, the study estimates, itemized giving would have declined 1.6 percent in 2009 and 2.4 percent in 2010.

The study also suggests that the higher tax rates, which would take effect in the second year, would have a bigger impact on giving that would capping the charitable deduction at 28 percent.

In 2008, households with adjusted gross income over $250,000 for couples or $200,000 for individuals represented 4.4 million of a total of 144 million individual tax returns filed, or 3 percent of all tax returns.

In 2008, those 4.4 million returns claimed 43.5 percent of all itemized charitable gift deductions claimed on individual tax returns, and represented a total of $69.93 billion claimed by high-income households, compared to a total of $170.4 billion claimed, the study says.

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