Challenging Conventional Wisdom on Charitable-Deduction Limits

As late as November 2009, President Obama’s proposal to limit tax breaks for charitable gifts and other itemized deductions to help pay for a health-care overhaul had gone nowhere in Congress, largely due to fears that limiting charitable tax deductions for wealthy people would dampen giving at a time when charities are under severe strain because of the recession.

Critics say nonprofits will lose donations if tax incentives are lowered. Yet, according to a recent study titled “Does the Incentive Effect of the Charitable Deduction Vary Across Charities” by Associate Professor Robert Yetman and Associate Professor Michelle Yetman, there are other circumstances that determine a loss of revenue for charities given higher or lower tax incentives.

The Yetman’s research was cited in the July 23 issue of the Chronicle of Philanthropy, in an article titled, “New Study Challenges Thinking Behind Charitable-Giving Tax Incentives.” Using IRS Statistics of Income data from 1985 to 2005, the Yetmans built an economic model to examine how state and federal income-tax rates affect giving to specific types of nonprofit organizations.

According to the study, past research used data provided by taxpayers and presumed that donations to all types of charities responded identically to tax incentives. However, the Yetmans use of data provided by charities allowed them to examine how state and federal income-tax rates affect giving to different types of charities. They found that limits on deductions for charitable gifts had little or no effect on nonprofits in health, human services, or public and social benefit sectors.

However, limiting deductions for charitable gifts did affect giving to private foundations and organizations devoted to animals, arts and culture, education and the environment.

Michelle Yetman, who was awarded tenure and named a Dean’s Faculty Research Scholar this year, has been presenting her research at conferences across the country. In March 2009 she presented at the American Accounting Association, Governmental and Nonprofit Section Meeting in Arlington, Virginia, and in August she presented at the American Accounting Association Annual Meeting in New York City. She presented two papers at both conferences.

In her research titled “Economic Consequences of Expense Misreporting in Nonprofit Organizations,” Yetman found that while nonprofits overstate the amount of expenses classified as charitable, ostensibly to attract more donations, donors are partially able to see through the overstatement. Yetman found that donors place significantly less weight on financial information for those organizations that overstate their charitable expenses, and that as the ease of obtaining financial information improves, so does donors’ disentanglement of low-quality financial reporting.

Yetman also presented her study, “Strategic Cost Shifting by Nonprofit Hospitals” coauthored with Professor Ranjani Krishnan from Broad College of Business at Michigan State University. They found that hospitals that shift costs towards patient-related program services and away from administrative and fundraising categories appear more efficient to stakeholders.