Changes mandated by the sweeping Republican-backed tax bill passed in Dec. 2017 likely reduce the tax incentive for some mid-level donors to give to Harvard—nonetheless, higher education experts say the bill’s ultimate impact on charitable giving is hard to predict.
When filing their taxes, Americans can select one of two options to claim deductions from the government: they can opt for a lump standard deduction or instead choose to itemize their taxes and receive deductions on each eligible category.
The December legislation changed the calculus for some American taxpayers choosing between the two options. The new system increases the size of the standard deduction—meaning 21 million fewer Americans now benefit from itemizing their taxes as compared to taking the standard deduction, according to an estimate by the Tax Policy Center in January.
This could be bad news for organizations that depend heavily on donations—including institutions of higher education like Harvard—because itemization tends to incentivize donations given that it offers a deduction specifically for charitable giving. The standard deduction option does not.
Elizabeth L. Clark, senior director of federal affairs at the National Association of College and University Business Officers, said she is concerned the tax bill could decrease giving to universities. Harvard’s $37.1 billion endowment is heavily funded by charitable donations.
In fiscal year 2017, the University received $1.28 billion in donations, ranking first among all American colleges and universities.
“For some taxpayers, the charitable deduction has in the past served as an incentive for charitable giving. We think that, with fewer itemizers, that incentive is gone for a number of taxpayers,” Clark said.
Nonetheless, Clark said it is difficult to anticipate the bill’s final effects on philanthropy in the United States, calling the legislation’s impact “unclear.” She said she hopes there is not a “significant downturn” in donations to higher education.
New York University law professor Harvey P. Dale also acknowledged the bill could reduce rates of charitable donations. But he pointed out the bill could have the opposite impact—the smaller overall tax burden possible under the new legislation could foster a greater willingness to donate.
In one example of this reduced tax burden, the bill decreases the tax rate for individuals in the top income bracket by almost 3 percent, from 39.6 to 37 percent.
“Tax rates are going down for at least a lot of people, and that leaves people with more money, and so if you look at the wealth effect, instead of the tax effect, there may be more money in the pockets of people who would be willing to give more,” Dale said.
Last November, University President Drew G. Faust said Harvard was working to assess the impact of provisions in the bill that relate to charitable giving. She also described a second way the bill could deter potential donors to the University.
Faust said she was concerned the 1.4 percent excise tax on endowment returns imposed by the bill—which would have cost the University $43 million if it took effect in 2017— could negatively affect charitable giving.
“One of the issues I’m concerned about is how the endowment tax might affect charitable giving to universities,” she said. “If I give to this university, it will be taxed. Whereas if I give it to someone else—a hospital, a scientific research center—it won’t be taxed. Does that disadvantage us in comparison with other charitable options?”
Despite all this, some alumni say they remain staunchly committed to donating to their alma mater.
Peter L. Malkin ’55, the namesake of the Malkin Athletic Center, said changes to the standard deduction are unlikely to deter major Harvard donors—including himself.
“My feeling is that those who are really committed to support Harvard with great affection for it will not be influenced by this,” Malkin said. “I think if anybody were to be influenced, it would influence people who give donations in smaller annual amounts where they no longer itemize the deductions.”
Paul A. Buttenwieser ’60, a former Crimson editor and a former member of the Board of Overseers, said neither the endowment tax nor other changes in the tax bill will affect his donations.
“My taxes are not a factor in my decisions about donations,” he said. “I realize that for some people it has to be, but I’m fortunate that it isn’t.”
“[The endowment tax] doesn’t deter me from giving to Harvard,” he added.
—Staff writer Eli W. Burnes can be reached at email@example.com.—Staff writer William L. Wang can be reached at firstname.lastname@example.org. Follow him on Twitter @wlwang20.
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