High Taxes Discourage Charity

(Flickr / Arthur John Picton)

(Flickr / Arthur John Picton)

Higher taxes hurt charities because they make people give less.

That’s the finding of a new report by the American Legislative Exchange Council (ALEC). In “The Effect of State Taxes on Charitable Giving,” authors William Freeland, Ben Wilterdink and Jonathan Williams document the changes in charitable giving that occur when states raise or lower taxes.

The finding, though unsurprising to students of economics, is nonetheless relevant to policy decisions about how best to help the poor. Raising taxes to fund government social programs may end up taking away funding from more effective charity organizations.

After examining different taxes in all 50 states, the authors concluded that a 1 percent increase in the personal income tax burden leads to a .35 percent decrease in charitable giving per dollar of state income. When the authors include all state taxes (not just income), the effect more than triples: “a 1 percent increase in the total tax burden is associated with a 1.16 percent drop in charitable giving per dollar of state income.”

The effect on charitable giving likely occurs for three reasons, conclude the authors. First, taxes reduce the income that people actually take home, making it more difficult for people to donate their money. Second, higher taxes can reduce future income by hindering economic growth. Finally, taxes sometimes “crowd out” charitable giving as people feel as if they have already paid their fair share toward helping others.

Numerous studies and policy experts have recognized that non-governmental organizations, whether religious organizations, charities dedicated to helping the poor, or for-profit companies, often have more success combating poverty than large, bureaucratic government programs. Yet this point is often forgotten in debates over tax policy, where it is assumed that cutting taxes logically implies selfishness or apathy toward helping the poor.

“Civil society may well appropriately—and perhaps more efficiently–fill necessary gaps in public needs that might happen to arise alongside a back stop of more money in taxpayer pockets, more economic growth and a government that provides for core social needs,” said the authors.

With 1.5 million tax-exempt organizations in the United States, there are ample opportunities for Americans to support specific causes. Charities are forced to compete for money and ensure effective outcomes. It seems they’ve made convincing achievements – over time, inflation-adjusted charitable giving across the country has increased consistently, except during the recession.

But charitable giving varies considerably by state, and ALEC’s report helps to shed light on how tax rates influence those differences. The states that give the most to charity as a percentage of income? Utah, Wyoming, and Georgia. Drawing up the rear of the list were New Hampshire, North Dakota, and West Virginia.

States with no income taxes saw especially large increases in charitable donations. “In every category, over each time period, the nine no income tax states grew their rates of charitable giving more than the nine states with the highest income taxes,” the authors said.

From 1997 to 2012, charitable giving in the 10 states with the highest tax burden grew 27 percent. But giving grew twice as fast in the 10 lowest-tax states. “The trend in these results is clear; the states with more pro-growth tax and fiscal policies tend to also have higher rates of growth in charitable giving,” the authors said.

Jonathan Williams, one of the report’s authors and vice president of the ALEC Center for State Fiscal Reform, said he hoped the report would “start a conversation about what steps state policymakers can take to encourage tax competitiveness, economic opportunity and philanthropic donations.” Let’s hope so.

Published on Opportunity Lives