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Improving the Generosity Rate
Charitable
Tax Deduction Would Boost Charitable Giving in Massachusetts
Massachusetts falls in the lower third of all states
when measured according to the rate at which its residents give to private charities.
This would change dramatically if Massachusetts voters approve ballot question
7, which would establish a state-level charitable tax deduction. The state would
move from the bottom third to either the middle third or the top third of states
in terms of its generosity, and residents would expand their giving by $1.43
billion over the next five years – or by $410 million more than the reduction
in tax revenues.
These are the findings of an analysis by the Beacon Hill
Institute at Suffolk University. BHI's Ray Shamie Center for Civic Enterprise
developed an index for the state's Generosity Rate in order to perform this
analysis.
Question 7
Under current law, charitable donations may be deducted
from income in figuring federal, but not Massachusetts, personal income tax
payments. Ballot question 7 would allow charitable donations to be deducted
from Massachusetts income, not only for the one-third of taxpayers who currently
itemize charitable deductions on their federal tax returns, but for non-itemizers
as well. The law would take effect on January 1, 2001 and would supercede an
outside budget section (Sec. 119) approved by the state legislature and signed
into law by Governor A. Paul Cellucci. The outside section calls for a similar
tax deduction.
With the charitable deduction, Massachusetts will join
33 other states that already offer tax incentives for giving to non-profit organizations.
Eligible organizations that would benefit from the deduction include religious,
health, educational, human service, arts and cultural, civic, environmental,
and international organizations as determined by the Internal Revenue Service
code. According to the National Center for Charitable Statistics, Massachusetts
is home to 19,373 active charities. (See http://nccs.urban.org/stcover/stc_MA.htm.)
The Generosity Rate
The Beacon Hill Institute's Generosity Rate measures
the value of charitable deductions itemized on federal tax returns as a fraction
of adjusted gross income, scaled so that the most generous state has a Generosity
Rate of 100%. According to the Generosity Rate, the Commonwealth ranked
39th in generosity among states in 1998. Utah, the most generous state (with the highest amount of itemized
deductions as a fraction of taxable income), had a Generosity Rate of 100%,
while for Massachusetts the rate was just 37.2% (see Table 1 for a full listing).
An alternative measure, the Generosity Index published by the Catalogue
for Philanthropy, ranked the Commonwealth dead last among all states. [1]
The charitable deduction would raise the amount of charitable
giving in Massachusetts. In doing so, it would cause the state to lose some
revenue but also cause taxpayers to give more. This is a matter of basic economics.
When charitable donations are deductible, it is cheaper to give, and so households
will make more donations to non-profit organizations that work for the public
good. Thus charitable donations rise as tax revenues fall.
Here is how it works. Currently a taxpayer who gives
$100 to a charitable organization may deduct it from income in computing federal
income tax. This saves the average taxpayer $21 in federal taxes, so the net
cost of giving the $100 is actually $79.
If the donation may also be deducted in computing state
income taxes, the cost of giving falls. Given a 5.8% state income tax, a taxpayer
who gives $100 to a good cause will now save $5.80 in state taxes and $19.78
in federal taxes (= $100 0.942 21%). The net cost of giving $100 is now just
$74.42, or about 6% lower than it was before. This in turn will encourage more
giving. The state will lose $5.80 in revenue but giving will rise.
It turns out that giving will rise by substantially more
than this amount. An analysis by the Beacon Hill Institute earlier this year
found that, with the deduction, donations to non-profit organizations will rise
by $1.43 billion over the next five years, while state revenues will fall by
$1.02 billion. [2] This is based on our determination that charitable giving rises
by 1.12% for every 1% decrease in the “tax price” of giving.
In the process, Massachusetts would rise from ranking
39th in terms of its Generosity Rate to ranking between 14th (putting it in the top third) and 30th (putting it in the middle
third). We reach this conclusion as follows: If the net cost of giving falls
by 6% and if, as we have found, the “elasticity” of giving with respect
to tax price is 1.12, then Massachusetts' Generosity Rate will rise by 2.42
percentage points, pushing its Generosity Rate from 37.2 to 39.62, just above
New Jersey, and thus into the middle third.
Another line of reasoning suggests that Massachusetts
would rise far higher, into the top third. This argument is based on the greater
generosity exhibited by states with income taxes and charitable deductions.
Divide the 50 states into three groups: those with no income tax (e.g. New Hampshire),
those with an income tax and state charitable deductions (e.g. New York), and
those with an income tax and no state-level charitable deductions (this category
includes Massachusetts). See Table 2. The Generosity Rate is 8.8 percentage
points higher (= 45.4%-36.6%) in states with an income tax and deductibility
than in states with an income tax and no deductibility. If Massachusetts were
to allow state-level charitable deductions, it is plausible that its Generosity
Rate would rise by 8.8 percentage points, or from 37.2% to 46.0%, catapulting
it from 39th to 14th in the state rankings. |
