No, removing the SALT cap will not reduce charitable giving

OWorm at The Hill, our Domestic Policy Studies colleague Howard Husock recently argued that repealing the $ 10,000 cap on the Federal Tax Deduction for Local and State Taxes (SALT) would reduce charitable giving. His claim, as we understand it, is based on the idea that high income taxpayers organize their lives to target a certain federal tax liability. So if they can deduct more dollars in property taxes (because the SALT cap has been eliminated), thereby reducing their federal tax liability, they will then reduce or eliminate other deductible expenses, such as their charitable donations. .

Although the repeal of the SALT ceiling has an impact on the progressivity and geographical distribution of the federal tax burden and may have consequences on the public finances of states and local authorities, there will be no negative risk for donations. charitable. In fact, if lawmakers repealed the SALT cap, charitable giving would likely increase.

Removing the SALT cap would increase charitable giving through two main channels. The first is an income effect: each taxpayer who currently details (or becomes a retailer after the repeal of the SALT cap) and who is subject to the cap would benefit from a tax reduction. In response, they would increase spending on all kinds of goods and services, including charitable donations. A reasonable estimate of the elasticity of charitable giving over income based on previous empirical work is one such, meaning that a 1% increase in income will lead to a 1% increase in charitable giving.

The second mechanism is a substitution effect. Repealing the SALT cap would reduce the after-tax price of charitable giving by increasing the share of households that retail. Households that would become retailers would see the cost of the donation drop from $ 1 per dollar donated to $ 1 less the household’s marginal tax rate. A reasonable estimate of this estimate of price elasticity is negative one: a 1% drop in the price of the tax increases charitable giving by 1%.

Income and substitution effects would be added to charitable donations. In our view, repealing the SALT cap entirely, in isolation, would increase after-tax income by 0.63% and reduce the after-tax price of charitable donations by 0.95%. Overall, total charitable giving would increase, not decrease, by about 1.6%, or about $ 5.3 billion. A similar calculation by our colleague Alex Brill of the expected impact of the Tax Cuts and Jobs Act of 2017 on charitable giving produced a remarkably accurate estimate.

While we fully understand the importance of charitable giving, our positive estimates should not necessarily be interpreted as endorsement of the repeal of the SALT limit. In fact, we agree that there is a strong case for maintaining or even reducing the current cap. But the fear of a reduction in charitable giving is not one of them.

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Original author: Stan Veuger, Kyle Pomerleau

Original location: No, removing the SALT cap will not reduce charitable giving


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