Economic Analysis of the Charitable Contribution Deduction for Non-Itemizers

Publication Date: April 2005

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

Type:

Abstract:

The 107th Congress version of (H.R. 7), passed by the House, had eight new tax provisions designed to benefit charities and charitable giving, the most important one being the charitable deduction for non-itemizers. This deduction, which was subject to a phased-in cap of $100 ($200 for joint returns), was in the President's initial tax proposal, although it was not capped. In 2002, S. 1924, providing a temporary deduction with a $400/$800 cap and other provisions was introduced in the Senate: the Senate Finance Committee adopted a version of S. 1924 with a floor and ceiling, also reported out as S. 476 in the 108th Congress and passed April 9, 2003. A similar non-itemizer deduction was in H.R. 7, reported by the Ways and Means Committee and passed by the House on September 17, 2003. S. 6 in the 109th Congress includes the same deduction. The President did not include the deduction in the budget for FY 2006. This paper focuses on the economic effect of the deduction for nonitemizers, assessing the incentive such deductions would create for increased charitable giving. It does not attempt to estimate other types of societal impacts.

Economic analysis suggests that the impact of the original proposed deduction on charitable giving is likely to be relatively small, due to the proposed $100/$200 deduction cap. For individuals and couples already contributing more than the cap, there is no additional incentive for further giving. Nonetheless, the deduction would still generate a significant government revenue loss. Effects are also reduced by estimates that project a limited response by taxpayers, particularly lower income taxpayers, to this kind of charitable giving incentive. Analysis suggested that even when the deduction is fully phased in , a dollar of revenue loss is likely to increase charitable giving by three cents, even under relatively optimistic assumptions. The effect would be only half as large if one netted out the percentage of contributions that go to provide sacramental services to church members. The higher caps in the 108th Congress proposals and in S. 6 in the 109th, as well as the floor is estimated to increase that amount to 18 cents.

The capped charitable contribution deduction for non-itemizers will add complexity to the tax system and to the simplified tax forms used by millions of taxpayers, since an additional line would have to be added. Charitable deductions are also particularly complicated for record keeping purposes because there is no unified reporting system. Finally, because of the small amounts in question and the absence of requirements for documentation for small gifts, tax evasion may increase; there are likely to be deductions taken even when no contributions were made.

This report will be updated to reflect legislative developments.