The Estate Tax and Charitable Giving:
State-by-State Analysis

By John S. Irons

Summary

Research has shown that eliminating the estate tax would have a significant negative impact on giving to charitable organizations. Using state-level data on charitable revenue, this report estimates the state-by-state loss in charitable giving that would result from a full elimination of the estate tax.

For the nation as a whole, estate tax elimination would have reduced charitable giving in 2001 by an estimated $10 billion. On average, states would have lost $187 million in annual charitable giving, with larger states losing considerable more.

This reduction in charitable giving represents an annual reduction of nearly $39,000 per charity filing with the IRS. Across states, New York would have lost the most per filing charity, nearly $77,000, while Wyoming would lose the least, at 6,800 per filing charity. Larger organizations and those charities that rely more heavily on bequest giving would likely lose substantially more from estate tax elimination.

Introduction

According to studies using data on IRS filings and a wide range of econometric research, the estate tax has been found to significantly encourage charitable giving. Since the estate tax allows for a charitable deduction at death, a repeal of the estate tax would mean the removal of a tax incentive for giving. Evidence supports the idea that people are aware of the tax implications of charitable giving at death, and that they change their giving patterns, both at death and during their lives, as a result of the estate tax.

Results from a new and comprehensive study estimate that a repeal of the estate tax would result in a drop in charitable giving nationwide through bequests and lifetime giving by approximately $10 billion annually. The study estimates a decline in charitable bequests ranging from 22 percent to 37 percent.[1] In 2001, there were $16.2 billion in charitable bequests; thus, repeal would have meant a loss of between $3.6 billion and $6.0 billion in charitable bequests in 2001. In addition, changes in the estate tax affect lifetime charitable giving since this type of giving also reduces estate tax liability. The amount of the reduction in lifetime giving is estimated to be approximately equal to the amount of the reduction in estate giving – about $5 billion.

This approximate total reduction of $10 billion in charitable giving is roughly equivalent to the annual giving of the largest 110 US foundations combined.

This short report estimates the impact an estate tax repeal would have on individual states.

State-by-state estimates

According to an analysis by the National Center for Charitable Statistics there were 246,112 charities (501(c)(3) organizations) across the United States who filed a return with the IRS (Form 990s) in 2000.[2] These organizations receive revenue from individual contributions, estate bequests, government grants, and other sources. As noted above, in 2001 estate tax bequests totaled $16.2 billion. Using information on the distribution of nonprofit revenue across states as well as national average bequest share of total nonprofit revenue, we can compute an estimate of the state-by-state amount of charitable giving that would be lost if the estate tax were repealed.[3]

By using the distribution of nonprofit revenue across states, rather than estimates of bequests, we are better able to determine the impact on nonprofits by state without assuming that bequests stay in the same state as the decedent.

Figure 1 shows the source of revenue for nonprofits. Private contributions are 19.9% of total revenues. Of these private contributions, 7.5% are in the form of charitable bequests.[4] Tables 1 and 2 show the state-by-state distribution of nonprofit revenue, estimated charitable bequests, the estimated amount of charitable bequests that would have been lost in 2001, as well as the total loss in charitable giving due to a repeal of the estate tax. Nationwide, per filing charity, each organization would lose, on average, nearly $39,000 in giving each year – with larger organizations, and those dependent on charitable bequests, losing significantly more.

It is worth noting two caveats to the numbers reported here. While these findings do not assume that bequest giving must stay in-state, actual reduction in giving may differ from those produced here to the extent that charities across states may rely more or less heavily on revenues from bequest giving and giving by those likely to be subject to the estate tax. In addition, to the extent that states revise (or eliminate) their own state-level estate tax laws in response to federal changes, there may be additional effects in individual states.

Finally, there are many reasons to believe that these estimates are too low. There may be a psychological impact created by a message that charitable giving at death through estate tax incentives is no longer encouraged. The estate tax benefit of charitable giving, which is a “selling point” for charities, will no longer be available as an added incentive for giving. In addition, the removal of the need for estate tax planning prior to death lessens the opportunity to introduce potential givers to charities and foundations.

For more information on the effect of estate tax on charitable giving see OMB Watch’s “The Estate Tax and Charitable Giving.”[5] For more information on estate tax issues, visit the Americans for a Fair Estate Tax website (http://www.fairestatetax.org).

Source:
Independent Sector (1997 data, left chart, http://www.independentsector.org/PDFs/inbrief.pdf),
AAFRC Trust for Philanthropy/Giving USA 2003 (2002 data, right chart, http://www.aafrc.org/bysourceof.html).

Table 1. State-by-State Impact of the Estate Tax Repeal on Charitable Bequests
(2001, Dollars in Millions)