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

Executive Summary

Improved incentives for private charitable donations would strengthen nonprofit organizations that provide a variety of public benefits in Puerto Rico. This study investigates options for stimulating additional charitable giving with enhanced tax incentives. We simulate the effects of proposed modifications of Puerto Rico’s tax deduction on charitable giving and government revenues. Based on our assessment from the economic literature on how individuals respond to incentives for giving, we find that lifting the ceiling on contributions could increase contribu- tions by more than the revenue loss to the Puerto Rico Treasury. Lifting the ceiling would therefore be a cost-effective way for taxpayers to pay for additional services of charitable organizations, compared with increasing direct grants. Reforms that modify or eliminate floors on contributions would add less to contributions than the revenue loss, but they would simplify tax filing and could lead to broader participation in charitable giving activities than our simulations imply.

Puerto Rico allows a full charitable deduction only for donations by itemizers in excess of 3 percent of adjusted gross income (AGI). As an alternative, itemizers may elect to deduct 33 per- cent of all donations. Those who give 4.5 percent of AGI or less are better off claiming deductions on a third of all contributions, while those who give more than 4.5 percent of AGI get a bigger tax benefit from deducting 100 percent of contribu- tions over 3 percent of AGI. In addition to the 3 percent floor, there is no deduction allowed for contributions that exceed 15 percent of income.

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