For decades, the U.S. tax code has subsidized donations by allowing taxpayers to deduct contributions to nonprofits from their income. But only taxpayers who itemize when filing their tax return can take advantage of these deductions — and those with the highest incomes benefit most.
When the individual provisions of the Tax Cuts and Jobs Act expire at the end of 2025, the standard deduction will decrease. This means tax incentives for charitable giving will be extended to more people because a larger number will be able to itemize their deductions.
But Congress can go further. It can encourage everyone to donate, regardless of their income — even those who don’t file taxes. How? By replacing the deduction with a system of matching grants.
Here’s how it would work: Individuals would no longer claim deductions for donations. They wouldn’t even have to file tax returns to benefit. Instead, nonprofits would report donations to the government and receive matching funds in return, giving the same incentive to anyone who donates.
For both cash and noncash contributions, such as art or stocks, donors wouldn’t need to keep receipts or fill out forms for their donations to be matched. Instead, charities would report contributions when they file a Form 990, which details their revenue and income to the Internal Revenue Service.
The match rate itself could correspond with the marginal tax rate of the average return, which by my calculations could be about 14 percent. Such an approach would increase the incentive for most lower-income households to donate, while lowering the incentive for most higher-income tax filers since they, like every other taxpayer, could no longer claim a deduction. The result: A more democratic and representative form of giving.
A large body of evidence, cited in a report I wrote for the Tax Policy Center, suggests that even for the same cost to the government as the current system, matching grants would provide a more effective incentive to donate than a credit or a deduction. Numerous lab experiments show that contributions increase more in response to matches than they do to equivalent rebates. For example, in one classic study published in 2003, researchers found that contributions were 21 percent to 97 percent higher for matches than for rebates. A 2017 experiment found similar results.
In a real-world example in Indiana, people were offered either a 50 percent tax credit for donations to universities and for 19 months, a dollar-for-dollar match, thanks to a $3 million contribution from a donor. Yet again, the results indicate that donations can be much higher with matches than with rebates.
The evidence doesn’t fully explain why people give more with matching funds. It’s possible that donors are confused about the benefits of subsidies that lower their taxes months after they donate, while matching funds provide an immediate payoff.
Evidence suggests that matching raises contributions but that the amount of the match doesn’t matter. One study by economists Dean Karlan and John List, for example, found that in a direct mail charitable campaign, a dollar-to-dollar match increased donations, but two-for-one and three-for-one matches didn’t raise donations any higher. This could mean people respond to matches just as they respond to the idea of getting a bargain rather than the size of the price cut.
Current System Isn’t Working
Right now, the system only benefits a small number of donors. While any taxpayer can make use of the federal tax incentive for donating, most don’t. The largest subsidies go to people with high incomes for three reasons:
First, the deduction is only available to those who itemize rather than take the standard deduction, which this year is $14,600 for individuals or married couples filing separately. Itemizing only makes sense for taxpayers with more than that amount in deductions from expenses such as state and local taxes, mortgage interest payments and, of course, donations. Those people tend to have higher incomes. For most families, the standard deduction is a better deal, so they don’t receive a subsidy for their charitable contributions.
Second, taxpayers with the highest income and the highest marginal tax rate get a bigger benefit from each dollar they donate. In 2024, someone in the bottom tax bracket could only reduce their taxes by 10 cents for every dollar donated, while someone in the top tax bracket could reduce their taxes by 37 cents for each dollar.
Third, taxpayers with very high incomes hold a disproportionate share of unrealized capital gains, which receive advantageous tax treatment. These gains come from assets that have grown in value since they were purchased, such as unsold stocks. Taxpayers who itemize and give away money from their wages or salaries essentially deduct the taxes they pay on the income they donate. But taxpayers who itemize and donate appreciated assets pay no taxes on the appreciation, but still lower their taxes by deducting it from their income.
The Tax Cuts and Jobs Act of 2017 exacerbated these patterns by substantially raising the standard deduction and limiting other itemized deductions. As a result, the share of taxpayers itemizing their deductions dropped from 31 percent in 2017 to 10 percent in 2020. Indeed, a recent report found that in 2018, charities lost $20 billion in donations because of the tax law. Even when these changes expire at the end of next year, the highest-income taxpayers will still more frequently itemize their deductions — and receive the largest subsidies if they do.
Benefits of Matching Grants
A matching grant system, in which charities report donations to the government and the government then provides some amount of matching funds, could alleviate many of these problems. High-income families would no longer receive a larger incentive to donate than families with lower incomes. By offering the same incentive to everyone, including those who don’t itemize or file taxes, this approach would encourage more people to donate. This could help address the decline in small-dollar donors and reduce the share of donations made by the wealthy.
Some small charities are not currently required to file detailed 990s, so they could face an adjustment. But the tradeoff would be more charitable contributions from people whose income isn’t high enough to itemize or who do not file.
Compliance could also be a problem, but that’s already the case with the existing deduction and will be with any alternative. For example, nonprofits might be tempted to report inflated donations. But that could be mitigated by only offering matching grants to organizations that undergo a yearly audit or work with a responsible third party, such as a certified public accountant.
The new system could be burdensome for small nonprofits that might have to do more administrative work or hire an outside expert. But the upside is potentially more donations.
Another possible challenge could arise from the federal government funding a religious organization through matching grants, which might be seen as a constitutional violation. One solution would be to restrict matching funds to secular charities and offer a refundable tax credit for donating to religious organizations.
Total contributions could fall because deep-pocketed donors would receive a smaller incentive than under the current system. On the other hand, everyone would receive an incentive, and the pattern of giving would better reflect the wishes of a larger cross-section of the population. That would be a good thing for the nonprofit sector — and society as a whole.
