Charitable gifts to colleges and universities would probably drop under the tax reform proposal put forward by President Trump, with several provisions contributing to the decline, according to a higher education representative.
Although Trump’s plan, introduced in April, would preserve the charitable deduction, it would also reduce giving incentives by decreasing the tax break’s value, Brian Flahaven of the Council for Advancement and Support of Education said July 20.
“Charitable giving is going to be affected, and it will likely decline,” said Flahaven, who spoke during a National Association of College and University Business Officers webcast.
Cutting marginal rates, a component of the president’s proposal, would likely decrease giving because the rate of the charitable deduction is tied to a taxpayer’s marginal rate, according to Flahaven. Another Trump proposal, doubling the standard deduction, would reduce the number of taxpayers who itemize from 30 percent to 5 percent, he said.
“That means that 95 percent of American taxpayers would not have the benefit of a charitable deduction,” Flahaven said.
The Trump plan would also repeal the estate tax. Citing studies showing the tax encourages charitable giving through bequests that are critical to colleges and universities, Flahaven said repealing it could negatively affect those gifts.
A recent study commissioned by Independent Sector and conducted by the Indiana University Lilly Family School of Philanthropy predicted a 4.6 percent drop in giving if current Republican tax reform proposals become law, Flahaven noted.
A better approach would be to enact a universal charitable deduction as part of tax reform, Flahaven said. Essentially, it would allow taxpayers to subtract their charitable gifts before they choose between taking the standard deduction and itemizing, he explained.
“It would expand the charitable deduction to 100 percent of American taxpayers, not just the 5 percent that would get the charitable deduction,” Flahaven said. The Independent Sector study, he added, predicts a $4.8 billion increase in giving with the universal charitable deduction.
“We’ve really been encouraging the administration and Congress to consider the universal charitable deduction as a way to help offset some of these unintended negative consequences on charitable giving that result from the doubling of the standard deduction and other aspects of tax reform,” Flahaven said, adding that lawmakers have been receptive to the idea.
There has been talk of using college and university endowments to help pay for tax reform, Flahaven said. Proposals include a mandatory payout or an excise tax on net investment income of endowments above $1 billion.
Although some lawmakers are concerned that schools with large endowments are not using the money for tuition relief, Flahaven stressed that endowments are long-term funding sources that support students, research, faculty, and other needs that otherwise would have to be funded by tuition or other sources.
“We’re going to be focused very clearly on getting the message out about endowments,” Flahaven said. “Because of the connection between endowments and college costs and concerns about college costs, that is a particular concern and one that we’ll have to watch as a tax reform package gets put together.”