Our Commonwealth does best when all people experience rising prosperity. But for several decades, the wealth and income of the top 1 percent of households has grown briskly while others have been left behind.¹ While there are many reasons for this trend, one contributing factor is the way the federal tax deduction for charitable giving disproportionately rewards the giving of those with incomes over $1 million compared with donations made by moderate- and low-income tax filers.

Higher-income households certainly have more money to give away and consequently tend to give larger dollar amounts than households with less income. However, even considering these differences, the tax benefits of charitable tax deductions are heavily skewed toward the top. The average tax filer in Massachusetts with an income under $50,000 deducted $141 in charitable giving in 2016, whereas tax filers with an income over $1 million deducted almost $187,000.² While the average income of the latter group is 160 times greater than the former, their average charitable deduction is 1,320 times as large.

Tax filers with incomes over $1 million claim almost half of all charitable deductions in Massachusetts, though they make up less than 0.5 percent of tax filers.³ Meanwhile 91.6 percent of tax filers (those with incomes of $200,000 or less) receive only 29.0 percent of the tax deductions.

Research shows that high-income households do not necessarily give a larger share of their income than do people with lower incomes. Many studies even find that overall, those with high incomes give a smaller share of income than do middle- and low-income givers.⁴ Nevertheless, the federal tax system delivers disproportionately large benefits to high-income households for their charitable giving.

A key reason the tax benefits for charitable giving are skewed so heavily toward high-income households is that federal tax filers only can deduct their charitable giving if they itemize their deductions. For most moderate- and low-income people, it makes more sense to take the larger (and simpler) standard deduction. For very high-income people, the standard deduction represents only a small portion of their income, prompting the vast majority to itemize deductions – including claims for charitable deductions – thus avoiding taxation on a larger share of their income.

According to national estimates by the Urban-Brookings Tax Policy Center, almost all charitable contributions by those with the highest 1 percent of incomes receive a tax deduction.⁵ Among middle-income earners, just over half of contributions receive a deduction. And among low-income earners, only 15 percent of charitable gifts receive the benefits of a tax deduction.

These differences are expected to become much greater when people file their 2018 federal taxes because substantially fewer moderate- and low-income people are expected to itemize their deductions. The federal tax law enacted at the end of 2017 doubles the standard deduction available for those who don’t itemize (to $12,000 for singles and $24,000 for joint filers). Both changes are expected to discourage moderate- and low-income tax filers from itemizing, but won’t substantially affect the choice to itemize among those with the highest incomes.

For those with the highest 1 percent of incomes, the portion of contributions that gets deducted from income taxes is projected to remain at 99 percent, according to national estimates by the Tax Policy Center.⁶ Meanwhile, among those with incomes in the middle, the percent of charitable giving that will get deducted is projected to fall to less than a quarter. And for those people with the lowest incomes, the amount of charitable giving that receives a tax deduction is expected to fall to 5 percent. In sum, the benefits of the charitable tax deduction will become significantly more skewed toward those with the very highest incomes.

Massachusetts does not have a charitable deduction for state income taxes. However, if the state’s income tax rate is reduced to 5.0 percent in January 2020, as anticipated by the Department of Revenue, then a state charitable deduction would be activated automatically the following year as a result of a trigger established in 2002. Adding a state charitable deduction to our tax code would reduce income taxes disproportionately for those with the highest incomes and would reduce state revenues by about $300 million annually,⁷ leaving less money for education, public health, transportation, affordable housing, and other programs funded through our state budget.

Our state and local tax systems already require low- and middle-income households to pay a larger share of their income in taxes than the very highest-income households do. Those in the bottom 20 percent of Massachusetts incomes pay an average of 10.0 percent of their income in total state and local taxes; the middle 20 percent pay an average of 9.3 percent of their income, and those with the highest 1 percent pay an average of 6.8 percent of their income.⁸ A state charitable deduction would add to this disparity.

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