Obama tax plan could cost charities $9 billion

I’ve written plenty about the soaring demand and declining resources of nonprofits providing social services. They’ve lost major donors, state and local funding, maybe some of their endowment with Madoff. Now, they can count on, collectively, losing another $9 billion under the Obama tax plan.

Tax Policy Center, a program of the Urban Institute and Brookings Institution, explains:

The proposal would cut deductions for taxpayers in the top two tax brackets starting in 2011, when the top rates will be 36 and 39.6.  About 1.2 percent of households would be affected in 2011.

Of course, higher income households donate more to charity than those with lower incomes, so the proposal affects a larger share of charitable contributions.  We estimate that 18.2 percent of charitable contributions itemized on tax returns are in the top two brackets in 2011.  Itemizers account for two-thirds of total charitable contributions in 2006, the latest year for which data are available.  Non-itemizers, bequests, foundations, and corporations—none of which would be affected by the proposal—account for the other giving.

Thus, limiting itemized deductions would affect roughly 12 percent of contributions.  Assuming that a one percent increase in the “tax price” of contributions induces a one percent cut in donations, this would translate into a $9 billion reduction in annual giving.  (See, e.g., this recent paper by Jon Bakija and Brad Heim for recent estimates of the elasticity of charitable contributions with respect to the tax price.)

That is not insignificant, although it is somewhat ironic that conservatives have only now discovered the virtues of high tax rates in boosting charitable contributions.