Lifting the SALT cap could reduce charitable giving

Lifting the SALT cap could reduce charitable giving
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Eliminating the ceiling on the state and local tax (SALT) deduction would primarily benefit the wealthiest taxpayers in the wealthiest states, but that has not deterred prominent Democrats — including Senate Majority Leader Chuck SchumerChuck SchumerBuild Back Better Is bad for the states  Dole to lie in state in Capitol Rotunda Biden points to drug prices in call for Senate social spending vote MORE (N.Y.) — from endorsing the idea. Were it to be included in a tax bill being floated by the House Ways and Means Committee and hidden in one of the multitrillion-dollar “infrastructure” bills, the effect would be profoundly regressive. 

The Committee for a Responsible Federal Budget has estimated that the top 0.1 percent of earners would get a $150,000 tax break, while the few middle-class households affected would get about $15. Currently, those itemizing their tax returns in high-tax states are limited to a $10,000 deduction, as per the 2017 Republican tax code revisions. Absent that cap, those who pay huge sums in locales such as New York — one home in my own suburban New York municipality has a $200,000 property tax bill — would have no such limit.

But if the regressive reality outlined above is not reason enough to retain the SALT cap, here’s another: Removing it is likely to reduce charitable giving.

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Here’s why: The 2017 tax bill dramatically simplified income tax returns for most Americans.

The increase in the “standard deduction” made it unnecessary for most taxpayers to itemize their returns. Absent itemizing, deductions — including the SALT deduction — disappear. The revised tax law has meant, according to the Tax Foundation, that only around 13.7 percent of taxpayers itemized their tax returns. That means that only relatively few high-income households — with substantial deductions that exceed the standard one — retain a tax-related incentive to give to charity. 

But for those who do itemize in a post-SALT deduction world, the incentive for charitable giving has been great. The charitable deduction remains virtually unlimited; one can reduce their taxable income by as much as 50 percent. It should be no surprise, then, that affluent taxpayers in high-tax states are major sources of charitable giving. They may be idealistic or religious, or a combination of the two — but the tax system rewards their charity.

Consider these data from the 2018 IRS report on the top 15 states, ranked by percent of filers taking the charitable deduction (the first listing available in a post-Tax Cuts and Jobs Act environment):   

  • Higher-income taxpayers in states across the country itemize their tax returns — and thus claim the charitable deduction generally. This is especially true, however, in “blue” states with high state and local taxes and a great many wealthy taxpayers; for example, California, Maryland, New Jersey, Massachusetts and Connecticut.

  • It is rich, blue-state taxpayer behavior that matters the most, however — because of the sheer dollar amounts involved as a result of the high number of wealthy taxpayers in these states. 
  • Eleven percent of Colorado taxpayers use the charitable tax deduction — and make contributions of just $3.7 billion.

  • Similarly, 11 percent of New York taxpayers take the charitable deduction — but that translates to $18 billion in charitable giving.  
  • In Delaware, the president's home state, 10 percent of taxpayers itemize and use the charitable deduction — but their contributions totaled only $403 million.

  • But the 13 percent of Connecticut taxpayers, a higher-taxed state, deducted some $2.6 billion in charitable giving.

A complete list of charitable giving by state, compiled by the Tax Foundation, can be found here.  

It is easy to understand why Democrats want to eliminate the SALT cap — it is their states’ taxpayers and campaign donors who are bearing the cost. But eliminating the $10,000 ceiling on state and local tax deductions means that the homeowner with the $200,000 property tax bill would then have an easy way to reduce a federal tax bill — even without using the charitable deduction. Wealthy taxpayers from high-tax states are among the most important sources of charitable giving overall, and are also, on aggregate, more likely to use the charitable deduction. 

So it is that the intra-Democratic Party SALT cap debate (Republicans are happy to retain the ceiling) becomes a question not just about a regressive tax code change but also one about whether Democratic Washington wants to squeeze charitable giving, even as nonprofits across the country have played a key role in helping America through the pandemic. 

For anyone who cares about both tax fairness and the health of American civil society, this is an issue that bears close watching.

Howard Husock is a senior fellow in domestic policy studies at the American Enterprise Institute, where he focuses on municipal government, urban housing policy, civil society and philanthropy.