Sunday, January 23, 2005

Technical Details for the Charity Index

Source Data:

The index is based on US federal income tax return data published by the IRS in the Statistics of Income Bulletin over a four-year period. Note that there is a two-year lag between the tax year and the year in which the IRS publishes the data, which will affect the most recent tax year used. The data used for the index are also included in other reports, including those published by the Catalogue for Philanthropy and the Urban Institute.

Limitations of the Data:

IRS data can only account for the charitable giving from itemized returns and is limited to the accuracy of reporting in those returns. Also, in 2002, for example, only 31% of individual returns were itemized. Therefore, accounting for those who do not use itemized returns requires creating an estimate, such as done by the AAFRC Trust for Philanthropy, where the estimate of total charitable giving by individuals in 2002 is approximately $175 billion compared to the total of approximately $140 billion reported on itemized returns, or some other, more simplified method. The percentage of itemized deductions varies considerably from state to state, which can make state comparisons problematic because of the corresponding differences in the available information on charitable giving.

Accounting for all these limits and balancing the desire for a simple, direct method for comparing individual charitable giving by state has led to the estimate described below, which is the key component of the index value used to rank states. It is recognized that there are still limitations in the absolute accuracy of the index, but that this represents a reasonable method for comparing states.

Calculating the Index Value:

The index value is determined by taking a four-year mean of charitable giving ranks among the 50 states. Using a rolling average is intended to smooth year-to-year fluctuations and regional aberrations and will help identify any potential long-term trends as the index is used going forward. The charitable giving rank for a state for a given year is based on the charity rate, an estimate of the average individual charitable contribution amount as a percentage of the average income. The average income is taken as the average adjusted gross income (AGI) from individual tax returns filed with the IRS. The estimate of the average individual charitable contribution amount is an average of two components weighted by the percentage of itemized returns. The first component is the average amount of charitable deductions taken on itemized individual tax returns. The second component applies to those returns that were not itemized and is arbitrarily taken as 15% of the national average of charitable deductions from itemized individual tax returns for that year. While arbitrary, this does yield a national estimate of individual charitable giving in the US that is comparable to the 2002 estimate by the AAFRC Trust for Philanthropy, for example. Thus, for Alabama, using 2002 returns:

Alabama average AGI - $38,472
Alabama average charitable deductions on itemized returns - $4,136
Alabama % itemized returns - 28%
National avg. charitable deductions on itemized returns - $3,455

Alabama est. avg. charitable contribution amount - 0.28*$4,136+0.72*0.15*$3,455=$1,536
Alabama charity rate - $1,536/$38,472=4.0%

Posting of data used in creating the current Charity Index is pending.

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