OMB Watch has noted that repeal of the estate tax would have three adverse impacts: it would increase concentrations of wealth and power; it would sharply curtail charitable giving; and it would reduce federal revenues likely causing cuts in programs serving low-income and vulnerable families. In this fact sheet we begin to explore the connection between charitable giving and the estate tax. Since there are no limits on the amount of money that can be left to charities – and bequests to private foundations are treated the same as those to public charities – charitable giving is a powerful way to lower the taxed value of the estate. Most estate tax filers recognize this as the deduction for charitable bequests is the second largest type of deduction taken. Only the deduction for a surviving spouse – in which an unlimited amount of money can be given – is larger. Yet for estates worth $20 million or more – the largest estates – the amount given to charity nearly equaled the amount given to the surviving spouse ($7.47 billion vs. $7.53 billion in 1997). Each year the amount of money given through charitable bequests goes up. For example, between 1995 and 1997, charitable bequests shot up more than 60%. In 1995, estates provided $8.7 billion to charities; in 1997, they provided $14.3 billion. The figure below shows the increase in giving. If the estate tax were repealed it is unlikely that all of the $14.3 billion in charitable giving would end. While the after-tax cost of a charitable bequest is lower than the after-tax cost of a charitable gift made during one's lifetime, it is, nonetheless, likely that some of the charitable bequests taken under the estate tax would be shifted to annual charitable contributions taken under annual income tax. No science can predict human behavior. Nonetheless, it is very clear from tax studies, that tax incentives help to stimulate certain behavior, including charitable giving. The estate tax, like other taxes, proves to be an incentive to give to charity. Estates that have tax liability give between two to three times as much to charity as estates without tax liability. The latest available data, 1997, shows that taxable estates gave to charities 2.1 times the amount non-taxable estates did. (Those filing taxable returns gave $9.6 billion; those filing non-taxable returns gave $4.6 billion.) Charitable Deductions Claimed in Estate Tax Returns: 1997 Size of Gross Estate # with Returns # with Charitable Deductions % Claiming Charitable Deductions Total Charitable Deductions Average Charitable Deduction per Return $600K but under $1 mil 47, 541 7,164 15.07% 1,126,204,000 157,203 $1 mil but under $2.5 mil 32,380 5,644 17.43% 1,505,839,000 266,803 $2.5 mil but under $5 mil 6,686 1,646 24.61% 1,300,423,000 790,050 $5 mil but under $10 mil 2,178 626 28.74% 1,015,740,000 1,622,258 $10 mil but under $20 mil 804 288 35.82% 955,473,000 3,456,503 $20 mil or more 417 207 49.64% 8,322,753,000 40,206,536 Source: IRS, Statistics of Income, (Summer, 1999). 2 columns added by James R. Repetti, "The Case for the Estate and Gift Tax," Tax Notes, March 13, 2000. As the table above demonstrates the wealthier the estate the greater the number of tax returns claiming a charitable deduction and the larger the charitable bequest. Nearly three-fourths of the $14.3 billion in bequests in 1997 came from estates worth $5 million or more, and nearly 60% came from the super-rich estates that are worth $20 million or more. While 15% of the returns from estates worth between $600,000 and $1 million made claims for charitable deductions, 50% of the estates worth $20 million or more did so. Based on this and other econometric data, most agree that repeal of the estate tax would have an adverse impact on charitable giving. The Treasury Department estimates that between $5 billion and $6 billion in charitable gifts would be lost each year if the estate tax is repealed. In a study for Independent Sector, Price Waterhouse concluded "abolishing the estate tax...would have reduced charitable bequests by about $3 billion out of an estimated $7 billion in 1996." Actually, charitable bequests turned out to be $10.2 billion in 1996, which would have increased the impact of the repeal. One respected estate tax attorney says over $10 billion per year in charitable giving would be lost. The estimates of impact are wide, but most conclude the impact would be substantial. Currently, estates can give $675,000 (double this for married families) in inheritance without being taxed. This is planned to increase to $1 million in 2006. The above data suggests that changing the amount that is excluded by taxation from $1 million to $2.5 million or $5 million would not dramatically hurt charitable giving, although it would have some impact on giving. Which Charities Benefit from the Estate Tax It is difficult to be precise because there is a paucity of data. The Treasury Department, however, has published 1995 data on charitable bequests in its 1999 Statistics of Income Bulletin. The largest number of charitable bequests went to religious institutions (8,401), but the largest dollar amounts went to educational, medical, or scientific institutions and private foundations. (See table and figure below.) Charitable Bequests by Type of Recipient: 1995 Type of Recipient # of Bequests Total $ Bequest Averabe Bequest per Return Private Foundations 981 3,127,984,000 3,188,567 Educ, Medical or Scientific 7,309 3,194,230,000 437,027 Other 6,355 2,483,781,000 390,839 Arts & Humanities 932 272,800,000 292,704 Religious 8,401 970,445,000 115,515 Social Welfare 611 68,687,000 112,417 Source: IRS, Statistics of Income, (Summer, 1999). Nearly the largest amount of money went to private foundations – $3.1 billion in 1995, but by far the largest amount per individual estate tax return. Roughly one-third of foundation assets come from estate revenues, particularly from larger estates. Thus, it can be expected that repeal of the estate would have a significant impact on foundations. This would mainly affect the creation of new foundations or enlarging existing foundation, but would inevitably have an impact on yearly giving by foundations. Educational, medical or scientific institutions would be greatly affected by repeal of the estate tax. In 1995, these institutions received $3.2 billion, and the second largest number of bequests, 7,309. This would likely directly affect charitable bequests to higher education institutions and medical facilities. The "Other" category in the figure above includes a range of social service organizations and other charities that are not covered by the remaining categories. In 1995, estates provided $2.5 billion to "other" charities. Repeal of the estate tax would likely have a significant impact on many human service charities that rely on gifts and bequests from wealthy donors. It would also likely have a major impact on cultural institutions such as our museums and symphonies. Based on the Treasury Department data, it appears that "social welfare" charities – those tax exempt 501(c)(3) organizations promoting civil rights, community development, social science research, or government effectiveness – would be the least affected by repeal of the estate tax. However, these groups are often heavily dependent on private foundations for support. Given the repeal of the estate tax would dramatically impact private foundations, these types of charities would also be significantly affected by repeal of the tax. In addition to the repercussion repeal of the estate tax would have on charitable bequests, the tax repeal would have other impacts on nonprofits. In FY 1999, the gift and estate tax provided $27.8 billion in revenue to the federal government, which is expected to steadily increase over the next eight years, according to the Joint Committee on Taxation. The average annual revenue is projected to be $33.7 billion, which is roughly 4.6% of total discretionary spending. If the surplus does not materialize, or if it gets used for tax cuts and debt reduction, this lost revenue will necessitate cuts in spending. Traditionally, cuts in discretionary spending are seldom made in military spending. Given the Bush administration's commitment to increases for defense spending, these cuts will need to be made in domestic discretionary programs, which account for $322 billion – a 10.5% cut. It is not uncommon for such cuts to be made in programs with constituents who have less political clout. Usually this means human services, primarily targeted to low-income families. In the end, the repeal of the estate tax will mean that the super-rich get a tax break while the less fortunate get nothing – and possibly could suffer. Since nearly one-third of charity revenue comes from government support, the repeal of the estate tax would have a triple-whammy on charities. It would mean less money through charitable contributions, reduced grants from private foundations, and less money in government support.