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The case for state charitable deduction |
from NewsLink, Vol. 4 No. 3, Spring 2000
For the second consecutive year, Massachusetts ranks near the bottom of the Generosity Index, a listing that compares state average adjusted gross income (AGI) with charitable giving. Compiled by the Ellis L. Phillips Foundation of Boston, the Generosity Index is a good measure of the resources available for giving among people in a state and the amount they give to charity.
In 1997, Massachusetts ranked third in the nation in average AGI but 48 out of 50 when it came to donations made to charitable causes. The details don't get any better. When taking into account contributions made by taxpayers with incomes between $100,000 and $200,000, Massachusetts ranks dead last. Even when more rigorous methods are used to measure giving, Massachusetts still ranks at the bottom. There are several explanations for the state's poor ranking. Among them is the notion that Massachusetts is a high-cost-of-living state, leaving families with less real disposable income for charity.
Some observers speculate that activist governments crowd out private initiative. People may feel less compelled to contribute when state government has assumed the primary role of provider of educational, human service, environmental and cultural programs.
What could be done to encourage more giving?
The Commonwealth could provide incentives through the tax code. A question on the November ballot would establish a state income tax deduction of 100% of charitable contributions, not unlike the federal deduction, for donations to eligible charities. The Massachusetts Senate has offered its own tax deduction as part of its FY 2001 budget.
Currently, the federal government offers a tax deduction for individual income tax filers who make charitable donations and who itemize their taxes. Thirteen of the states that levy income taxes also provide for a state charitable deduction.
Unlike direct government support for nonprofit organizations, tax deductions empower individuals to vote with their dollars and encourage an alternative to the government provision of public goods. Judge Richard Posner, writing in Economic Analysis of Law (1986), observed that a subsidy of this kind is “politically important because it transfers from the government to the individual taxpayer some of the power to decide who shall be recipients of altruistic transfers, a decision that in most societies is made at the political level.”
Charitable deductions reduce the price of giving and in turn induce taxpayers to give more.
An analysis by the Beacon Hill Institute estimates that the benefits of a state tax deduction outweigh the costs to the state's treasury. The increased amount of giving over the next five years would be roughly $5.5 billion, or 4.2 times higher than the $1.3 billion in lost tax revenue to the state during the same period. Even taking into account losses to the federal government in tax revenue of $1.1 billion over the next five years, the increase in giving is still more than double the decrease in tax revenues.
What does this mean for taxpayers?
Today, if a donor gives $500 to a Massachusetts homeless shelter, that donation costs $500; the donor receives no benefit from the state.
If an income tax deduction were allowed for nonitemizers, the price would fall to $471. For taxpayers who itemize, the cost of a $500 donation would be $366.
Both the ballot question and the Senate proposal would allow nonitemizers to take a tax deduction. Bringing in nonitemizing taxpayers would make a state charitable deduction more democratic.
The state's nonprofit sector already provides a variety of much-needed services for the Commonwealth's citizens. A charitable tax deduction would enable nonprofit organizations to expand their work across the state.
the guarantee, of further robust
NewsLink is the quarterly newsletter of the Beacon Hill Institute for Public Policy Research at Suffolk University. © 1996-2003. All rights reserved.
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