Published:July 29, 2024

Author:Tracy DeStazio

ND Experts

Do tax policies really matter for charitable giving?

The short answer is yes.

As most taxpayers know, the U.S. tax code creates incentives for some donors to give money to charities. But the huge tax reform policies of 2017, known as the Tax Cuts and Jobs Act (TCJA), changed that for millions of households. As a result, charitable giving fell by nearly $20 billion annually, according to new research by a University of Notre Dame economist.

This particular reform - the largest change enacted in U.S. giving incentives in a generation - not only affected charitable donation amounts, but also changed the game for charities and proved that tax policy really matters for giving.

The study, released as a working paper by the National Bureau of Economic Research, also found that churches saw much less of a drop in giving than other charities, and sophisticated donors were able to "re-time" some of their gifts to take advantage of the incentives prior to the tax changes. The research was conducted by Daniel Hungerman, a professor in Notre Dame's Department of Economics and a research associate at the bureau, and co-authors Xiao Han and Mark Ottoni-Wilhelm, both of Indiana University Indianapolis.

Daniel Hungerman, professor of economics at the University of Notre Dame. (Photo by Barbara Johnston/University of Notre Dame)

The new tax code increased the standard deduction amount between 2017 and 2018, essentially doubling it. In addition, the government placed a $10,000 cap on the deduction of state and local taxes (better known as SALT). These changes made it more advantageous for most taxpayers to take the standard deduction, rather than going through the trouble of listing out their itemized expenses - including their charitable donation amounts. For these taxpayers, this meant there was no longer any tax-based incentive to give since they weren't getting a federal tax benefit for doing so.

"This was the biggest tax reform since 1986, and Congress had hoped it would lower federal taxes and help simplify the tax code," Hungerman said. But one result, he explained, was that about one in five households stopped itemizing their taxes, making a big impact on the nonprofit sector.

For those taxpayers who switched to the standardized deduction, the TCJA caused charitable giving in 2018 to decrease by roughly $880 per taxpayer, amounting to a drop of $20 billion between what was projected for that tax year and what was actually donated.

In the United States, where charitable giving to the nonprofit sector represents about 2 percent of the gross domestic product, "the charitable deduction involves hundreds of billions of dollars in donations and tens of billions of dollars in tax revenue each year," the co-authors wrote.

One piece of good news from the study, however, is that the tax reform caused little change in giving to religious congregations. The researchers used the term "congregations" to include churches, synagogues, mosques and TV/radio ministries. The drop was found to only affect "other charitable organizations," such as those involved with helping people with basic needs, contributing to arts and culture and preserving the environment.

Hungerman noted that he and his co-authors devised a novel method to adjust estimates for re-timed giving, or giving by donors who anticipated the tax changes and who chose to donate early, right before they went into effect. "Following the introduction and passage of TCJA in the fourth quarter of 2017, forward-looking taxpayers may have anticipated losing itemization in 2018, and consequently re-timed gifts into 2017," according to the co-authors.

"It's important to note that public policy affects charitable activity and behavior - and tax policies really do matter when it comes to taxpayers' generosity."

"This new technique allowed us to see a bump in giving in 2017 and to accommodate for that in our final figures," Hungerman explained.

"Such anticipation matters for interpreting the estimated effects of changes in tax policy," the co-authors wrote in their study.

But this is not the last time this particular tax reform policy will be up for discussion.

Come Jan. 1, 2026, when several of the TCJA provisions are set to expire, Congress may get the chance to revamp and find other ways to offer tax relief for taxpayers.

"While trying to lighten the tax burden on the American public, Congress has enacted a tax reform that hurt nonprofits, but there are other ways of going about it," Hungerman said. "They will have to revisit this at some point, and our hope is that they think about changing this part of the tax code.

"But what happens in November could really impact how we revisit this law. It's important to note that public policy affects charitable activity and behavior - and tax policies really do matter when it comes to taxpayers' generosity."

Contact: Tracy DeStazio, associate director of media relations, 574-631-9958 or [email protected]

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