Gov. Paul LePage’s prediction that his proposed income tax cut and plan to tax nonprofits would lead to a “flood” of charitable giving drew a number of groans from an audience in Westbrook last week.

As it turns out, attendees had reason to be skeptical.

While the governor has pitched the income tax cut as a long-term remedy for Maine’s economic ills, national data on charitable giving shows no proven correlation between the most generous states and low income tax rates. Also, LePage’s plan to eliminate itemized deductions for charitable giving could actually discourage donations to nonprofits in Maine, the second stingiest state in the country when gifts to religious institutions are included in the data.

“The evidence is generally contrary to what the governor is claiming,” said Brian Galle, a professor studying tax policy and nonprofits at Boston College Law School. Galle, who has co-authored studies to assess federal changes to the tax subsidies in itemized deductions, said that caps and reductions on tax deductions for charitable donations reduce giving.

LePage’s office did not respond to a request for comment.

The governor’s two-year budget plan eliminates the itemized deduction for charitable donations altogether. Other states, Congress and more recently President Obama have tried to fill budget gaps by considering caps on charitable deductions, which are essentially tax subsidies to encourage donations. However, the LePage plan to eliminate the deduction takes the trend even further.


Michael Allen, the governor’s tax policy adviser, said he had not calculated the revenue that the state would recapture by eliminating the subsidy. However, a 2013 tax expenditure report produced by Maine Revenue Services showed that deductions for donations to private education, health care and other nonprofit organizations totaled $127.5 million over a two-year period. Allen said the savings would be less in the governor’s budget. That’s because the Legislature in 2013 followed the lead of other states and capped itemized deductions for charities, thereby reducing the value of the subsidy.

Such caps have had big impacts on charitable contributions in other states, according to a 2013 study by Jon Bakija, an economics professor at Williams College. He wrote that tax incentives had a direct correlation to donations, especially among high-income donors.

“Tax incentives for charitable donations in the U.S. succeed in causing donations to increase, probably by about as much or more than they cost in terms of reduced tax revenue,” Bakija wrote.

A 2011 report by the Congressional Budget Office arrived at a similar conclusion. The study was designed to assess the effects of an array of policy initiatives that lowered the itemized charitable deduction on federal tax filings. Congress adopted the charitable write-off in 1907. There have been changes to the subsidy over time, but increasing budget pressures have prompted federal lawmakers to squeeze out more revenue by scaling back the deductions. States like New York, Vermont, North Carolina, Missouri and Michigan have all tinkered with charitable deductions. In some instances, states have restored previously eliminated subsidies because of the decline in donations. Missouri, for example, recently restored itemized deductions for food pantries and child advocacy centers, according to a report by Pew Charitable Trusts.

The 2011 CBO report found that there are a number of reasons why people donate to charities – altruism, recognition, or some direct benefit from the donation. However, “empirical studies have generally found that the amount of giving is responsive to changes in the after-tax price of giving.”

The CBO report also noted that charitable giving spiked in 1986, the year before the Tax Reform Act went into effect. The law sharply reduced income tax rates while reducing the value of charitable giving by 24 percent.


Critics worried that the change would lead to a drop in nonprofit donations in subsequent years. Donations by wealthy individuals did decrease, but the Tax Policy Center noted that the “predicted drop … did not materialize.”

It’s not clear whether that means there’s validity to LePage’s theory that cutting or eliminating Maine’s income tax will result in a “flood” of donations to nonprofits.

“An economist would probably also say that there’s something to the governor’s intuition, that eliminating the total tax burden that people face might increase charitable giving,” Galle said.

However, Galle added an important caveat.

“If it’s actually true that people are richer (from LePage’s tax plan), that might actually prompt them to give a little bit more,” he said.

As it stands, there’s little evidence that income tax rates affect charitable giving at the state level.


In October, The Chronicle, a news outlet covering the nonprofit industry, compiled a nationwide analysis of data based on tax returns of Americans who itemized their deductions, including charitable gifts. The analysis includes donations to religious organizations and churches, thereby creating a regional disparity between the rate of giving in Northeastern states and the Sunbelt, where religious participation is traditionally higher. Even with the regional disparity, income tax rates and the ratio of charitable giving appear unrelated.

The five most generous states – Utah, Mississippi, Alabama, Tennessee and Georgia – all had top marginal income tax rates between 5 and 6 percent. The least generous states – New Hampshire, Maine, Vermont, New Jersey and Rhode Island, respectively – have an assortment of top tax rates. Maine has a top rate of 7.95 percent. New Hampshire, with the lowest rate of giving in the country, has no income tax or a sales tax. The Granite State does assess a 5 percent income tax on dividend income.

Six states with no income tax are not among the top 10 in charitable donations, even counting religious donations.

LePage has acknowledged that the concept of taxing nonprofits, which is also included in his budget plan, may seem “distasteful.” However, he’s argued that the large nonprofits, particularly hospitals and private colleges, can stress local infrastructure and therefore should have to “pay their fair share.”

It’s unclear if that argument will gain traction in the Legislature, which now controls the fate of the governor’s budget. Nonetheless, the governor may need to provide assurances other than his income tax cut that nonprofits will thrive under his budget.

Steve Mistler — 620-7016

Twitter: @stevemistler

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