alec.org SEPTEMBER 2015 STATEthe FACTORA PUBLICATION OF THE AMERICAN LEGISLATIVE EXCHANGE COUNCIL The Effect of State Taxes on Charitable Giving By William Freeland, Ben Wilterdink and Jonathan Williams Executive Summary n often overlooked aspect of public policy is the role When all state taxes are considered, a 1 percentage point in- A that charitable organizations have in addressing some of crease in the total tax burden is associated with a 1.16 percent society’s most pressing concerns. Because of this important drop in charitable giving per dollar of state income. Similarly, role and since charitable organizations are funded privately this State Factor found that an increase in total tax burden of through donations, understanding how state policies interact roughly 1 percentage point of total state income results in a with charitable organizations is crucial for a robust discussion roughly 0.09 percentage point decrease in the level measured about public policy. This State Factor examines state tax poli- charitable donations as a percent of income. cies that encourage charitable giving, apart from the charita- ble giving deduction. While many factors certainly influence an individual’s choice To learn more about how the American about donating to charity, there are broad policy choices that Legislative Exchange Council helps develop can encourage higher rates of growth in charitable giving. By innovative solutions in partnership with examining various tax burdens and tax rates with rigorous eco- lawmakers and business leaders, or to become nomic analysis, this paper’s research findings show that a 1 a member, please visit www.alec.org. percent increase in the personal income tax burden is associat- ed with 0.35 percent decrease in charitable giving per dollar of American Legislative Exchange Council state income. Similarly, this State Factor found that an increase 2900 Crystal Drive, Suite 600 in personal income tax burden of roughly 1 percentage point Arlington, VA 22202 of total state income results in a roughly 0.10 percentage point Tel: 703.373.0933 decrease in the level of measured charitable donations as a Fax: 703.373.0927 percent of income. www.alec.org THE STATE FACTOR For these figures, the opposite is also true: a tax cut of the size Introduction described will result in a proportionate increase to charitable giving. Moreover, given that total state charitable giving as a he concept of civil society has existed for centuries, yet it is percent of income ranges from roughly 5.2 percent down to T too often left out of serious conversations about public pol- 1.15 percent across states and years, this suggest that taxes icy. Civil society is a collection of individuals who are connect- have a strong effect on charitable giving. ed through various social institutions and range from national groups with many chapters to local community organizations. These strong findings indicate that charitable giving increases Too often, discussion on the size and scope of government ig- when the burden of government, through taxes, is reduced. nores the role of civil society, particularly the larger role civil so- This effect is three-fold. First, taxes reduce an individual’s in- ciety can be expected to fill as government is reformed in order come, leaving less income to donate to charity in a given year. to tax less and focus its responsibilities on core competencies Second, taxes reduce potential income growth that could that government is uniquely situated to accomplish. have resulted in subsequent charitable giving. Third, taxes pay for public services and citizens may decide that they are This unique place in society is recognized by the United States already paying their share of social spending through taxes government by granting non-profit status, which exempts these and decline to contribute to charity, thus “crowding out” organizations from tax treatment as a business, precluding or- charitable donations. While it is clear that tax reductions do ganizational taxation under the corporate or personal income not necessarily translate into loss of government services— tax code and even allows private money donated to these orga- there are many ways that governments can spend tax reve- nizations to be deducted from the tax liability of donors. nues more efficiently—it is certainly relevant that when taxes are reduced, charitable organizations are likely to offset re- When discussions of tax reductions or spending reform occur ductions in public benefits. within state legislatures and the public sphere, discussions of charitable giving are often absent, even from the talking points It is also worth noting that the reverse effect is also true; an of tax reduction and spending reform advocates. These de- increase in taxes is associated with a decrease in charitable bates often focus on advocates of big government lamenting giving. These increases in taxes, which are then translated into the loss of public services, with all spending deemed essential government spending for a given purpose, may reduce charita- and already at the most frugal of scales, while tax reformers ble giving in that area. This negative feedback loop could result note the proliferation of government waste ripe for cutting, in worsening a problem that additional government spending the benefits of additional economic growth as true social as- seeks to solve. Given these findings, the impact of tax changes sistance (more jobs, more income and more entrepreneurial on charitable giving is an often overlooked piece of the pub- opportunity) and the positive “Laffer” effects of tax cuts which lic policy puzzle and policymakers should consider it carefully partially dull the loss of revenue that would otherwise be ex- when discussing tax policy changes. pected from tax cuts. But what is often forgotten is the charitable sector—both what they provide currently and what more they would be able to provide given a tax cut. That is, if lower tax states tend to give “This State Factor examines state tax more, and tax cutting states increase their giving, then charita- ble giving belongs in the conversation regarding state tax cuts. policies that encourage charitable Civil society may well appropriately—and perhaps more effi- giving, apart from the charitable ciently–fill necessary gaps in public needs that might happen to arise alongside a back stop of more money in taxpayer pockets, giving deduction.” more economic growth and a government that provides for core social needs. 2 • AMERICAN LEGISLATIVE EXCHANGE COUNCIL THE EFFECT OF STATE TAXES ON CHARITABLE GIVING The space between what individuals are able to accomplish stitute Fellow Charles Murray describes the unintended con- on their own, voluntarily, and what government is able to—or sequences of simple output based government aid programs, should—accomplish is filled by another crucial component of “The first effect [of government policies] . was to make it civil society: private charitable organizations. Charitable orga- profitable for the poor to behave in the short term in ways that nizations, broadly defined, are non-governmental collections were destructive in the long term. Their second effect was to of individuals or communities that work to solve some problem mask these long-term losses—to subsidize irretrievable mis- in society or otherwise provide social value in the gap between takes. We tried to remove the barriers to escape poverty, and private enterprise and government action. These organizations, inadvertently built a trap.”1 in their most abstract sense, have been around in some form or another as long as people have been interacting with one another. Today, there are countless charitable organizations, diverse in size, scope and mission. Ranging from religious or- ganizations to public policy groups, these groups generally do not seek to make a profit, like businesses, and are not an arm of any government. Whether it is a foundation that donates millions to fighting global disease and hunger or the neighbor- hood church that operates a food bank for the neediest in a community, charitable organizations fill an important role in civil society while relying exclusively on voluntary donations. According to some, solving social problems is thought to be en- tirely in the purview of various government programs funded by taxpayers. However, there are limits to what government is able to accomplish and, perhaps more importantly, limits on what government should attempt to accomplish. Much has been written on the effectiveness of privately fund- The government programs, funded by the ed charitable organizations and the lackluster performance Workforce Investment Act, provide aid of government-run aid programs. Of course, there is a role to about 7 million people annually. Only for government aid programs, but when it comes to provid- ing long-term assistance to individuals in need, private charity 56 percent of enrollees in the program is unquestionably in a better position to do so. Government find work, while 20 percent are unable to is able to acquire—through taxes—and directly spend large amounts of money on a large number of people, often in the retain their job after six months. form of government assistance checks. However, government agencies are less able to predict and meet specific needs of individuals and communities. Much of the lasting benefits of Howard Husock, a philanthropy researcher and Vice President charity come from individualized attention and knowledge that at the Manhattan Institute for Policy Research, highlights a government is often unable to provide. comparison between government job training programs and private job training programs. The government programs, Solving societal problems is rarely, if ever, as simple as transfer- funded by the Workforce Investment Act, provide aid to about ring money from one individual to another. Instead, the focus 7 million people annually. Only 56 percent of enrollees in the on an individual’s development is what is most important.