An Analysis of Potential Tax Incentives to Increase Charitable Giving in Puerto Rico

Abstract

This policy brief summarizes the findings of a larger report on potential tax incentives to increase charitable giving in Puerto Rico. Improved incentives for private charitable giving would strengthen nonprofit organizations in Puerto Rico. Taxpayers may choose between a 100 percent deduction for contributions over 3 percent of adjusted gross income (AGI) or a 33 percent deduction for contributions with no floor. Deductions may not exceed 15 percent of AGI. Removing the 15 percent ceiling would be a relatively cost effective way of encouraging more giving.

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Introduction

Improved incentives for private charitable giving would strengthen nonprofit organizations in Puerto Rico. Because of the public benefits provided by a strong and vibrant nonprofit sector, policymakers are interested in identifying ways to increase the private financial support received by these organizations. This study investigates options for reforming current tax incentives in Puerto Rico to stimulate additional charitable giving. We summarize current laws and charitable giving in Puerto Rico, review studies by economists on how tax incentives affect giving, and present and estimate the effects of alternative ways to structure the deduction.

We estimate that lifting the current 15 percent ceiling on contributions would increase contributions by more than the revenue loss to the Puerto Rican Treasury and would, therefore, be a more costeffective way to pay for additional services of charitable organizations than increasing direct government grants. Reforms that instead modify or eliminate current floors on contributions would add less to contributions than the revenue loss. Such changes would, however, make it easier for taxpayers to understand and claim the deduction. By increasing the number of taxpayers who would take advantage of the incentive, simplification could increase charitable giving by more than our estimates, which consider only the effect of the improved financial incentive.

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