TAX POLICY & CHARITABLE GIVING

Transcription

1 TAX POLICY & CHARITABLE GIVING October 5, 2017 Joyce Dulworth, CPA Partner Una Osili Associate Dean for Research & International Programs Lilly Family School of Philanthropy 1

2 TO RECEIVE CPE CREDIT Participate in entire webinar Answer polls when they are provided If you are viewing this webinar in a group Complete group attendance form with Title & date of live webinar Your company name Your printed name, signature & address All group attendance sheets must be submitted to training@bkd.com within 24 hours of live webinar Answer polls when they are provided If all eligibility requirements are met, each participant will be ed their CPE certificates within 15 business days of live webinar LILLY FAMILY SCHOOL OF PHILANTHROPY Formerly the Center on Philanthropy, founded in 1987 Became a school in 2011 Recognized leader in research, education & training Increases understanding of philanthropy & improves its practice worldwide Currently core faculty & 40 affiliate faculty in more than 20 fields Strategic partnerships with IU School of Public & Environmental Affairs & School of Liberal Arts Core program areas Academic Programs The Fund Raising School (TFRS) Lake Institute on Faith & Giving Women s Philanthropy Institute Research International Programs 2

3 PRESENTATION OUTLINE Overview & background on charitable giving Proposed tax policy changes impacting donors Findings about the impact of the tax proposals on charitable giving Summary research conclusions Other proposed tax changes impacting NFPs Conclusion Overview & Background 3

4 HISTORY OF THE CHARITABLE DEDUCTION 1917: creation of charitable gift deduction on taxable income Introduced four years after beginning of modern income tax 1940: income tax expanded to 75% of population : above-the-line charitable deduction Source: Giving USA Foundation GIVING USA 2017 GIVING USA 2017: 2016 CONTRIBUTIONS BY SOURCE* $390.1 billion donated $281.9 billion donated by individuals 81.8% of total giving by individuals contributed by itemized giving *In billions of dollars all figures are rounded Source: Giving USA Foundation GIVING USA

5 CHANGE IN HIGH-NET-WORTH HOUSEHOLD GIVING IF INCOME TAX DEDUCTIONS OR ESTATE TAX WERE ELIMINATED If you & your family received no income tax deductions for charitable giving, would your household charitable giving increase, decrease or stay the same? If the estate tax were permanently eliminated, meaning your estate would not be taxed after you died, would the amount you left to charity in your estate plan increase, decrease or stay the same? % % % 48.3% % 24.2% 30.8% 8.7% 9.2% 1.0% 2.1% 0.3% 0.4% 2.2% 2.1% 1.6% 2.5% 16.9% 17.9% 6.3% Dramatically decrease Somewhat decrease Stay the same Somewhat increase Dramatically increase Dramatically decrease Somewhat decrease Stay the same Somewhat increase Dramatically increase Source: The 2016 U.S. Trust Study of High Net Worth Philanthropy Report Proposed Tax Policy Changes 5

6 GOALS FOR POLICY REFORM Reduce the tax burden on individual households without a significant decrease in tax revenue On all households On lower-income households Simplify the federal tax code Incentivize charitable giving Criteria used to evaluate & compare tax reform proposals (GAO, 2016) Fairness Efficiency Simplicity Transparency Administrability PROPOSED TAX POLICY CHANGES Standard Deduction Tax Brackets Charitable Deduction Current Law (2016) $6,300 (individuals); $12,600 (joint filers) 10%, 15%, 25%, 28%, 33%, 35%, 39.6% Camp Proposal $11,000 (individuals); $22,000 (joint filers) 10%, 25%, 35% White House Proposal $12,600 (individuals); $24,000 (joint filers) 10%, 25%, 35% House Tax Reform Blueprint $12,000 (individuals); $24,000 (joint filers) 0%/12%, 25%, 33% Unified Framework $12,000 (individuals); $24,000 (joint filers) 12%, 25%, 35% Itemizers only Itemizers only Itemizers only Itemizers only Itemizers only 6

7 Findings About Impact of Tax Proposals on Charitable Giving CURRENT STUDY Using data from the Panel Study of Income Dynamics (PSID) & the Philanthropy Module, we calculated the responsiveness of households to changes in tax policy Using the American Enterprise Institute s Tax-Calculator, we simulated proposed changes in tax policy to estimate the effects on charitable giving & tax revenue 7

8 Part One: Estimating Household Responsiveness to Giving PANEL STUDY OF INCOME DYNAMICS Largest & longest running longitudinal household survey in the world Longitudinal household data set following the same families & their decedents from Philanthropy Panel Study (PPS), the philanthropy module of the PSID, collects data on household giving (available ) 8

9 KEY CONCEPTS: TAX-PRICE ELASTICITIES & NONITEMIZER GIVING Challenges Tax policy analysis often relies on IRS data, which does not include data on giving by nonitemizers Solutions The PSID includes giving by nonitemizers which allows us to estimate average giving by nonitemizers Previous analyses often rely on assumed elasticities for the effect of tax price on giving (-0.5 & -1.0) Using the PSID, we can calculate price-tax elasticities for each income group DONATIONS ARE RESPONSIVE TO CHANGES IN TAX POLICY Tax-price elasticity of giving: degree donations change in response to changes in tax policy Calculating the price of giving For itemizers, the after-tax cost or price of giving a $1 donation is estimated as one minus the taxpayer s maximum marginal tax rate (MTR) Price of giving $1 = 1 MTR Example (marginal tax rate = 25%): Price of giving $1 = = $0.75 Calculating the tax-price elasticity Elasticity = % change in donations % change in price of giving 9

10 TAX-PRICE ELASTICITY OF GIVING Example: if a nonitemizer would normally donate $100, what is the expected donation if the tax filer were to switch from nonitemization to itemization status with a marginal tax rate of 25% holding all other assumptions constant? Percentage change in price of giving = 25% Elasticity Donation if nonitemizer (tax price = 1) Donation if itemizer with MTR = 25% (tax price = $0.75) Change in Charitable Giving % Change in donations 1* $100 $125 $25 25% 0.5 $100 $ $ % 0** $100 $100 $0 0% 1 $100 $75 $25 25% 1.44*** $100 $136 $36 36% AVERAGE GIVING & ELASTICITIES Using PSID data to construct a panel data set of households with several years of information for each household, we could estimate income dependent elasticities Income Bracket Percentage of Nonitemizers Nonitemizer Average Giving Elasticity <$50, % $ $50,000 99, % $ $100, % $1,

11 Part Two: Simulating Proposed Tax Policy Changes TAX-CALCULATOR Partnered with the Open-Source Policy Center (OSPC) at American Enterprise Institute (AEI) to use their Tax-Calculator Microsimulation model to simulate proposed changes in tax policy The Tax-Calculator simulates the U.S. federal individual income tax. In conjunction with microdata that represent the U.S. population (IRS PUF) & a set of behavioral assumptions, the Tax-Calculator can be used to conduct revenue scoring & distributional analyses of tax policies Additional modifications have been made to the Tax-Calculator for this project in order to incorporate data available from the PSID but not the IRS, such as nonitemizer giving & newly calculated tax-price elasticities of giving Used data from the Internal Revenue Service Statistics of Income Public Use File, 2009 * * 2009 is the most recently available data set 11

12 TAX POLICY Six policy scenarios examine various combinations of three major policy changes Increasing the value of the standard deduction to $11,000 for individuals & $22,000 for married couples Extending the charitable deduction to nonitemizers & Decreasing the highest marginal tax rate to from 39.6% to 35% Increased value of the Standard Deduction* Extension of Charitable Deduction Decrease in highest marginal tax rate to 35% Current Law N/A N/A N/A Scenario 1 Yes No No Scenario 2 No Yes No Scenario 3 No No Yes Scenario 4 Yes No Yes Scenario 5 Yes Yes No Scenario 6 Yes Yes Yes *$11,000 for individuals; $22,000 for joint filers SCENARIO 1: INCREASE IN STANDARD DEDUCTION -12.0% -8.0% -4.0% 0.0% 4.0% 8.0% 12.0% Charitable Giving 3.9% $11.0 billion Charitable Giving -6.90% -2.67% -3.28% Tax Revenue % -5.20% -0.85% Total Revenue 2.3% $64.2 billion Under $50,000 $50,000-$99,999 $100,000 12

13 SCENARIO 2: EXTENDED CHARTABLE DEDUCTION -12.0% -8.0% -4.0% 0.0% 4.0% 8.0% 12.0% Charitable Giving 4.3% $12.2 billion Charitable Giving 1.55% 8.37% 8.38% Tax Revenue -1.57% -1.06% -0.23% Total Revenue 0.47% $13.1 billion Under $50,000 $50,000-$99,999 $100,000 SCENARIO 3: DECREASE IN TOP MARGINAL TAX RATE -12.0% -8.0% -4.0% 0.0% 4.0% 8.0% 12.0% Charitable Giving 0.75% $2.1 billion Charitable Giving -1.25% 0.00% 0.00% Tax Revenue -1.14% 0.00% 0.00% Total Revenue 0.86% $24.1 billion Under $50,000 $50,000-$99,999 $100,000 13

14 SCENARIO 4: INCREASE IN STANDARD DEDUCTION & DECREASE IN TOP MARGINAL TAX RATE -12.0% -8.0% -4.0% 0.0% 4.0% 8.0% 12.0% Charitable Giving 4.6% $13.1 billion Charitable Giving -6.90% -4.52% -2.67% Tax Revenue % -5.20% -1.99% Total Revenue 3.2% $88.2 billion Under $50,000 $50,000-$99,999 $100,000 SCENARIO 5: INCREASE IN STANDARD DEDUCTION & EXTENDED CHARITABLE DEDUCTION -12.0% -8.0% -4.0% 0.0% 4.0% 8.0% 12.0% Charitable Giving 2.5% $7.0 billion Charitable Giving -0.07% 5.30% 7.25% Tax % Revenue -6.66% -1.23% Total Revenue 2.9% $82.2 billion Under $50,000 $50,000-$99,999 $100,000 14

15 SCENARIO 6: INCREASE IN STANDARD DEDUCTION, EXTENDED CHARITABLE DEDUCTION & DECREASE IN TOP MARGINAL TAX RATE -12.0% -8.0% -4.0% 0.0% 4.0% 8.0% 12.0% Charitable Giving 1.7% $4.8 billion Charitable Giving Tax -1.34% 5.30% 7.25% % Revenue -6.66% -2.37% Total Revenue 3.8% $106.1 billion Under $50,000 $50,000-$99,999 $100,000 SUMMARY Total Household Charitable Giving Total Federal Income Tax Revenue Net Difference (Charitable Change + Revenue Change) Universal charitable deduction (only) 4.3% -0.5% -0.03% Republican proposals (Standard deduction + 35% tax rate) -4.6% -3.2% -3.6% Republican proposals + universal charitable deduction 1.7% -3.8% -3.6% 15

16 LIMITATIONS Assumption: nonitemizers will share a tax-price of giving elasticity with itemizers in their same income category Endogeneity: tax-price is directly linked to giving Reliance on 2009 data in the IRS PUF (this is the most recently available data) PSID is not representative of the top 2 3% SUMMARY RESEARCH CONCLUSIONS & IMPLICATIONS A 35% tax rate & an increased standard deduction would reduce charitable giving by $13 billion Adding an expanded charitable deduction would increase charitable giving by $4.8 billion This shows the importance of considering the impact on giving & the not-for-profit sector as part of tax & fiscal policy decisions 16

17 Other Proposed Tax Changes Impacting NFPs OTHER TAX PROPOSALS IMPACTING NFP ENTITIES Unrelated business income Reduced corporate income tax rate Raise $1,000 UBI exemption to $10,000 Tax royalty payments from licensing an organization s name or logo Tax certain corporate sponsorship payments as advertising Disallow offsetting UBI losses against UBI gains bucketing 17

18 OTHER TAX PROPOSALS IMPACTING NFP ENTITIES Charitable giving Repeal 80/20 rule for gifts that provide athletic seating Restrictions on gifts to permanent endowments Donations limited to basis on certain noncash gifts IRA rollovers to charities Expand age limit Expand allowable beneficiaries such as donor advised funds Claim charitable deductions up to April 15 OTHER TAX PROPOSALS IMPACTING NFP ENTITIES Private foundations flat rate for excise tax on net investment income College & university endowments Tuition remission Eliminate the rebuttable presumption test for compensation Tax-exempt bond restrictions on 501(c)(3) entities Repeal of the Johnson Amendment 18

19 OTHER TAX PROPOSALS IMPACTING NFP ENTITIES Planning considerations For donors unknown impact for 2018 so consider gifting in 2017 Focus on nontax benefits of gifting Stay in communication with donors Estate tax repeal may be unrepealed Review sources of UBI & determine impact Calculate impact on your charitable gifts given the research findings Stay current with industry associations updates QUESTIONS? 19

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21 THANK YOU! FOR MORE INFORMATION Una Osili Associate Dean for Research & International Programs Lilly Family School of Philanthropy Joyce Dulworth, CPA BKD, LLP 21