In 2018, then-president Donald Trump signed the Tax Cuts and Jobs Act. Among its many provisions, it simplified the filing process for millions of taxpayers by increasing the standard deduction from $6,350 to $12,000 for single filers, from $9,350 to $18,000 for head-of-household filers, and from $12,700 to $24,000 for joint filers from 2017 to 2018.
Taxpayers who had previously deducted charitable donations by itemizing their returns were now incentivized to take the standard deduction. As a result, nonprofit leaders feared that taxpayers who made the switch — and especially those in the middle-income bracket — would dial back giving, since the law reduced the tax incentive for people to donate to charity.
Seven years after Trump signed the Tax Cuts and Jobs Act (TCJA), it turns out these fears were warranted.
In late July, the National Bureau of Economic Research published a study showing that roughly 23 million households switched from itemizing their charitable deductions in 2017 to taking the standard deduction in 2018. For households that made the switch, the amount they gave to charity dropped by an average of $880.
Add it all up, and the increase in the standard deduction contributed to an approximate $20 billion decline in giving in 2018, according to the report. The authors classified $16 billion of this amount as a “permanent annual drop.”
The report, which noted that direct service organizations bore the brunt of the decrease, is the latest in a string of studies suggesting that funders across the board have dialed back giving. It also underscores how changes to tax law may have forced fundraisers to engage affluent donors to fill the gaps. These givers are more likely to itemize their returns, and if we’re to assume they kept the money flowing, the chasm between megadonors and middle-income Americans has only grown since the law’s passage.
In an email to one of the report’s co-authors, Mark Ottoni-Wilhelm, professor of economics at Indiana University Indianapolis and professor of philanthropic studies at the Indiana University Lilly Family School of Philanthropy, I expressed worries that the findings represented an “unmitigated disaster” for nonprofits. Fortunately, he talked me back from the ledge.
“Calling the results an ‘unmitigated disaster’ would be overstating the situation,” he said. “But it isn’t good news. The study finds a sizable decline in charitable giving from an important subset of people who support nonprofits.”
The power of incentives
The central purpose of the National Bureau of Economic Research (NBER) paper was to look at charitable giving by the “important subset” that Ottoni-Wilhelm alluded to — people who switched from itemizing on their federal taxes before the TCJA to taking the standard deduction after the bill was enacted.
Of the $20 billion that wasn’t donated by taxpayers who made the switch, $4 billion was redirected toward the 2017 tax year in an effort to benefit from itemizing deductions. The remaining $16 billion in donations that didn’t materialize is simply that: money that didn’t make it into the hands of nonprofits.
These figures starkly illustrate how tax incentives shape charitable giving — clearly the case when it comes to institutional giving, as well. Legacy foundations, for example, tend not to disburse much more than 5% of noncharitable-use assets annually — some give even less — even though they can replenish the coffers with contributions. Trustees opt for this approach because it ensures the foundation’s perpetuity, but at the end of the day, they’re operating within the guardrails set up by the IRS.
Meanwhile, some donor-advised fund account holders will wait years before putting money in the hands of working nonprofits, despite being allowed to take an immediate tax break. Should Congress change how DAF account holders can distribute funding, they’d change their behavior.
But until then, we can expect most foundations and DAF account holders to adhere to what can be described as a minimalist approach to out-the-door giving. That doesn’t mean these funders are misguided or tight-fisted — although some have made that case — as much as making perfectly understandable grantmaking decisions in response to corresponding incentives.
In a similar vein, Ottoni-Wilhelm said that by reducing the tax incentive to give, the TCJA’s provision to nearly double the standard deduction “increased the cost (or price) of giving. And since then, there hasn’t been another major tax-policy change that has caused people to be willing to give more, so the price of giving has stayed the same, and that means the $16 billion annual drop in giving is permanent (that is, $16 billion less than what it otherwise would be), at least until something occurs that causes people to give more again.”
Ottoni-Wilhelm stressed that the taxpayers who switched from itemizing to taking the standard deduction in the data set didn’t stop giving entirely. “Rather,” he said, “they gave less than when they did when they itemized.”
Middle-income donors in retreat?
In December 2017, the Washington Post’s Todd C. Frankel cataloged nonprofits’ prescient fears after Trump signed the TCJA into law.
Beyond worrying about an aggregate loss in support, nonprofits envisioned a future when fundraisers would be even more reliant on the approximately 11% of affluent donors who itemize their taxes. Leaders were also concerned about the composition of future support. Frankel’s piece referenced charities’ concerns that social service organizations and religious groups could lose out in a philanthrosphere dominated by ultra-wealthy donors mostly cutting big checks to museums, universities and the like.
In a sector already defined by top-down prerogatives, and where more “democratic” ways of funding are exceptions to the rule, the Trump-era tax changes only exacerbated the already growing problem of philanthropic top-heaviness.
To be clear, the NBER report does not analyze where individuals who itemized their returns after the TCJA went into effect spent their charitable dollars. That said, I was struck by a sentence in the study’s press release noting that “most of the decrease was in … giving to organizations whose primary focus is helping people in need of basic necessities.”
While we can’t make a definitive empirical correlation, this finding appears to at least casually affirm fears that the TCJA’s change in the standard deduction would lead to an exodus of middle-of-the-pyramid donors who are the fundraising lifeblood of direct services organizations.
Assuming this outcome came to pass, it has forced some advancement officers to ramp up efforts to engage deep-pocketed prospects and donors, further entrenching a funding model where the megadonors have a disproportionately influential voice in shaping organizations’ missions, programming and operations.
Debating the “generosity crisis”
The new report packed an added punch because it was the latest in a barrage of foreboding studies attesting to Americans’ tepid giving in recent years.
Last November, the Indiana University Lilly Family School of Philanthropy found that giving rates to all types of charities, including religious organizations, decreased among all racial and ethnic groups studied over an 18-year span. Around the same time, a report from Independent Sector revealed that in 2022, the U.S. nonprofit sector saw a 1.7% decline in total giving, a 10% drop in the number of donors and a 3.5% decrease in retention rates. And in late June of this year, Giving USA’s annual numbers show that adjusted-inflation giving from individuals dropped by 2.4%.
These studies have fed the narrative that philanthropy is navigating what Vox’s Celia Ford calls a “generosity crisis.”
Ford suggests these fears are overblown, since what we broadly call “generosity” can show up in different ways. Sure, a middle-income American may give less to a homeless shelter, but what if they’re volunteering more or participating in a neighborhood child care collective?
Moreover, “the IRS data cannot, by definition, tell us about non-itemized charitable giving,” writes American Enterprise Institute’s Howard Husock. This includes “cash placed in the collection plate on Sundays or in the Salvation Army’s red buckets during the holiday season, or donated by people who take the standard deduction.” Philanthropy — “love of humanity” — goes beyond what is figured in around tax time.
That said, the NBER’s data on giving from taxpayers who switched to the standard deduction can’t be waved away. “We found that the decline [in giving] is clearly attributable to the increase in the standard deduction put into place by the TCJA,” Otton-Wilhelm said.
In light of that, I’d be happily flabbergasted if the “permanent” annual $16 billion shortfall in giving was matched by less trackable in-kind acts of generosity by taxpayers who switched to the standard deduction — and slightly less flabbergasted if future research shows that giving by affluent donors who itemized their returns held steady or increased.
“A possible silver lining”
So does the NBER report suggest that Americans are less generous than they were before the 2017 tax bill?
This isn’t an entirely fair question. While we can ask billionaires and affluent legacy foundations to give more with a relatively clear conscience, there’s something unsettling about questioning the “generosity” of middle-income taxpayers responding to a heavy-handed incentive to take money that would have gone to charities and use it to pay down debt, fund their child’s college education, or go on a family vacation.
These behaviors comport with the incentives drawn up by the bill’s supply-side-inclined authors, and with the TCJA set to expire in 2025, its proponents need to make the case that the trade-off — less money for nonprofits, more money sloshing around the economy — constitutes a net gain for society.
I also asked Ottoni-Wilhelm if anything resembling a “silver lining” could be gleaned from the report. He reminded me that while tax law can depress giving, it can also galvanize it. The next several years may be consequential ones for the laws governing charitable funding, and the TCJA with its $16 billion giving hit may not be the last word.
“A possible silver lining [in the study] could be if policymakers see these results as evidence that this unintended consequence — the decrease in giving — could be removed by decoupling the tax incentive for charitable giving from the taxpayer’s decision about whether to itemize or take the standard deduction,” Ottoni-Wilhelm said. “That could be accomplished by allowing taxpayers who donate to take a tax credit instead of a deduction.”
