A newly released report shows that the current cap on deducting state and local taxes appears to be reducing charitable giving, particularly in states with higher property and sales taxes.
Background. Under President Trump’s 2017 sweeping tax legislation called the Tax Cuts and Jobs Act, Congress put in place a limit of $10,000 on the federal deduction for state and local taxes—which previously had been fully deductible. This cap on the state and local taxes deduction (referred to as the SALT deduction cap) impacted Democratic-led states such as New York and California hardest due to their disproportionately higher property and sales taxes. However, it was thought by some commentators that the cap would spur charitable giving by the wealthy; the reasoning behind this was that in high SALT states, wealthy taxpayers who pay sometimes upwards of $100,000 in these taxes may be looking to make more charitable donations to offset the loss of the full SALT deduction. This, however, has not proven to be the case.
American Enterprise Institute Research. The American Enterprise Institute released new research recently based on the first two years since the legislation went into effect that showed the opposite effect. In high SALT states, the wealthy actually gave less to charitable causes than they had prior to the implementation of the SALT cap. This reflects that rather than trying to decrease federal taxes by increasing charitable donations, these wealthy taxpayers appear to feel that they had less money to give to charitable causes. The author noted:
All the counties that saw less giving were in the top 5 percent in household income, and all were in blue states that typically have high state and local taxes and where the cap on deductions for those taxes hit hardest. In Westchester County, New York, for example, charitable giving among those reporting more than $200,000 in income fell from $1.4 billion in 2017 to $1.17 billion in 2019, according to the most recently released IRS data. In wealthy Marin County, Calif., total charitable giving decreased from more than $613 million in 2017 to $585 million in 2019. These are notable in no small part because California and New York are by far the nation’s largest sources of charitable dollars at $36 billion and $19 billion, respectively.
Further, the author of the research noted that in 2020, individual giving as a share of total charitable giving across the whole of the United States dropped below its historic level of 70%—only the second time this has happened.
It is important to note that the Tax Cuts and Jobs Act also increased the standard deduction, so that many taxpayers who previously itemized deductions—and saw a tax benefit from making charitable contributions—no longer were seeing such a benefit. In response to the lack of charitable giving from this change, Congress enacted an “above the line” $300 deduction ($600 for married filing jointly) that incentivized cash donations by non-itemizing taxpayers, but that provision expired at the end of 2021. Thus, individual charitable giving is likely to continue its downward trajectory and the nonprofit sector has yet to feel the full impact of the loss of these incentives.
Looking for Solutions. In light of both changes’ devastating impact on charitable giving, the nonprofit sector is scrambling to find ways to bolster charitable giving across the board, but currently there are no proposals with consensus. Some favor repealing the SALT cap, and New York challenged the legislation in court; however, last week the Supreme Court refused to hear the case, which alleged that the Trump Administration had unconstitutionally targeted Democratic states with the legislation, leaving the SALT cap in place. Some commentators favor reenacting the above the line deduction for cash donations or offering a tax credit for charitable donations that would affect more taxpayers than simply repealing the SALT cap, but so far Congress has seemed unwilling to act on either proposal.
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