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Charitable Tax Deduction Would Increase Bay State Giving Substantially

April 5, 2000

Massachusetts voters are considering a ballot initiative that would allow them to deduct donations to charitable organizations from their personal state income tax. This initiative aims to increase charitable giving in Massachusetts, a state known for its lack of generosity.

The initiative, if passed by voters in November, would allow all taxpayers who make charitable contributions to be eligible for a state personal income tax deduction. Charitable contributions are those donations to qualified charities as determined by the IRS. These include religious, health, educational, human service, arts and cultural, civic, environmental and international organizations.

The proposed law would go into effect on January 1, 2001. The deduction would be available to all taxpayers, including those who do not itemize on their federal tax returns. About one-third of Massachusetts residents itemize deductions on their federal tax returns. Even fewer file returns with charitable deductions.

Compared with other states, in a measure of income and giving Massachusetts has a poor record of charitable giving. The Commonwealth ranked 48th in a 1997 “Generosity Index” that measured contributions among the states compared to income. [1] When it comes to giving by taxpayers with incomes over $100,000 but less than $200,000, Massachusetts fares worse. In this category the Commonwealth ranks last according to an analysis performed by the Catalogue for Philanthropy. [2]

Tax incentives are of proven effectiveness in encouraging giving. The “price” of giving a dollar can be measured as $1 minus any tax reduction in taxes enjoyed as a consequence of giving that dollar. A state deduction would reduce the price of giving.

The Beacon Hill Institute estimated the effects this ballot initiative would have on individual giving to charities and tax revenues. BHI found that as a result of the new tax deduction, charitable contributions would increase by $1.435 billion over a five-year period. The cost to the Commonwealth would be approximately $1.016 billion in revenues over the same period. See Table 1.

Table 1. Estimates of the Charitable Tax Deduction's Giving and Revenue Effects

Year

Change in Giving [3]

Lost Tax Revenue

2001

$279 million (more)

$198

2002

$282

$199

2003

$286

$203

2004

$291

$206

2005

$296

$209

 

The increased giving would exceed the loss in tax revenue by nearly 40%. This increase would allow the state to transfer some government-provided services to the private sector. The opportunity to transfer responsibility from the public sector to the private sector would widen as more taxpayers contributed more to charitable organizations.

Providing tax incentives for charitable donations enjoys popular support. A Beacon Hill Institute survey in 1998 found that 69% of Massachusetts voters would be more inclined to give to charities that help the poor if they received a more generous tax break for giving. This sentiment cut across all religious, income, educational and ethnic groups.

If the proposed measure passes, Massachusetts would improve its standing on the so-called "Generosity Index" of charitable giving. In addition, the ballot proposal would spur a substantial increase in giving over current levels.

Table 2. Massachusetts Charitable Giving

Number of Returns
Charitable Contributions (1000s)
Number of Itemized Returns
Number of Itemized Returns with Charitable Deductions
Percentage of Itemizers
Average Itemized Deductions
Generosity Index
             
2,958,740 $2,454,740 1,068,712 983,905 33.35% $2,495 48

Source: August 26, 1999 Chronicle of Philanthropy, "Tax Deductions for Charitable Giving";Catalogue of Philanthropy.

The Beacon Hill Institute is recognized nationally for its research on taxpayer behavior and on charitable tax credits. Continuing research on charitable tax incentives is conducted under the auspices of the Institute's Ray Shamie Center for Civic Enterprise.

Footnotes

[2] Analysis by George McCully, June 30, 1999 for the Catalogue for Philanthropy using Statistics of Income Bulletin from the Internal Revenue Service (IRS).

[3] Change in giving compared to what we predict would have been given in this year without the deduction.

[4] Based on the extent of giving and income in 1997 reported by the Chronicle of Philanthropy, we can estimate what giving would have been had the charitable deduction been allowed on state income taxes in 1997. We estimate that giving would have increased to $2,725 on average per itemized filer.

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Posted on April 6, 2000; HTML revised on July 12, 2007 10:15 AM