Introduction
Late Wednesday night, the Senate passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The bill provides loans, tax breaks, and transfers aimed at providing economic relief to households and businesses impacted by the Coronavirus pandemic.
Included in the tax changes is a new above-the-line deduction for charitable contributions specifically for taxpayers who do not itemize (i.e., those who claim the standard deduction). These taxpayers may deduct from their adjusted gross income (AGI) up to $300 of qualified charitable contributions. This provision only applies to tax year 2020.
Projected Effects on the Budget and Charitable Giving
PWBM estimates that this provision will cost about $2 billion. This estimate accounts for two possible forms of behavioral response. First, this policy would induce some taxpayers who would normally opt to itemize to instead take the standard deduction.1 Second, faced with a larger tax subsidy, some filers will choose to increase their charitable donations.2 We estimate that this second effect would likely be small—that is, the new deduction would likely do little to spur giving.
PWBM estimates that the provision would increase total charitable contributions in 2020 by about $110 million. This change amounts to a 0.03 percent increase—PWBM projects total household charitable contributions to be $320 billion in 2020. The negligible impact on total giving is in part due to the design of the deduction’s ceiling limitation: for the many non-itemizing families who already give more than $300, the marginal tax subsidy would still be 0 percent under the policy. Raising the ceiling or structuring the limitation as a floor would incentivize more giving but at a higher budgetary cost to the government.3
Projected Distributional Effects
PWBM estimates that the new charitable deduction would result in small average tax cuts for all income groups except the lowest quintile. Table 1 shows various measures of the provision’s distributional impact.
| Income group | Average tax change | Tax units with a tax cut | Percent change in after-tax income | Share of tax change | Share of federal taxes paid | ||
|---|---|---|---|---|---|---|---|
| Share with tax cut | Average tax cut | Under current law | Under the proposal | ||||
| Bottom quintile | $0 | 0.4% | -$25 | 0.0% | 0.2% | 0.1% | 0.1% |
| Second quintile | -$5 | 21.6% | -$30 | 0.0% | 9.6% | 2.3% | 2.3% |
| Middle quintile | -$15 | 40.9% | -$40 | 0.0% | 22.0% | 10.3% | 10.3% |
| Fourth quintile | -$30 | 58.9% | -$50 | 0.0% | 34.2% | 19.1% | 19.1% |
| 80-90% | -$40 | 59.7% | -$65 | 0.0% | 19.1% | 14.9% | 14.9% |
| 90-95% | -$35 | 49.1% | -$70 | 0.0% | 8.0% | 11.0% | 11.0% |
| 95-99% | -$30 | 37.5% | -$80 | 0.0% | 5.8% | 16.3% | 16.3% |
| 99-99.9% | -$25 | 24.2% | -$105 | 0.0% | 1.0% | 12.7% | 12.7% |
| Top 0.1% | -$15 | 14.7% | -$110 | 0.0% | 0.1% | 13.1% | 13.1% |
Note: “Income” is defined as AGI plus: above-the-line deductions, nontaxable interest income, nontaxable Social Security benefits, nontaxable pensions and annuities, employer-side payroll taxes, and corporate liability.
About 53 percent of the benefits would accrue to the upper-middle income groups (60th to 90th percentiles). The share of tax units with a tax cut and the share of the total dollar benefits of the tax change are both highest for these taxpayers. Families in this income range benefit most because those with higher incomes are more likely to itemize and wouldn’t be eligible for the deduction, while lower-income groups are more likely to have no taxable income to further reduce. Note, however, that the average tax cut for those families who receive the tax cut is increasing with income due to increasing marginal tax rates; families that face higher marginal tax rates benefit more for each dollar reduction in their taxable income.
Due to the relatively small size of the deduction, changes in average after-tax incomes for each income group are negligible. The share of federal taxes paid by each income group would be unaffected by the deduction.
Victoria Osorio produced this analysis under the direction of Richard Prisinzano. Calculations are based on PWBM's model that is developed and maintained by PWBM staff.
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This effect is qualitatively small due to the low dollar amount cap on deductible contributions. ↩
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Following empirical evidence, we assume a tax-price elasticity of charitable contributions of -0.5. ↩
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See PWBM’s previous analysis exploring policy reform options for establishing a non-itemizer charitable deduction. ↩