Wednesday, November 23, 2005

What state is the most generous?

The Catalogue for Philanthropy recently released a report on the generosity of the nation's 50 states. The Bible Belt has enjoyed the positive light this puts them in. However, the methodology is crucial to consider--we can find a more accurate indicator of giving with a little work.

There's a lot at play here. The CFP chart refers to computes the "generosity index" by taking a state's ranking in Average AGI (which is gross income after deductions for things like IRA contributions, education, self-employed business expenses, capital and sec 1231 losses but before the itemized deductions that most people think of when they hear "you can deduct that") and subtracting it by the state's ranking in itemized charitable deductions. A married couple must have at least $10,000 in itemized deductions to even be counted in this index (itemized deductions include just about everything else that's not listed above--medical and misc expenses beyond a % of AGI threshold, property and state taxes, mortgage interest, charitable contributions, etc)--if they have less than $10,000, they just take the standard deduction.

Am I confusing you yet? The IRC (internal revenue code that has all the tax rules) is a ridiculously complicated thing of over 3.4 million words. The bottom line is that only 30% of people in the country itemize--generally these people are at least moderately affluent, because to ring up $10,000 just in deductions, you usually have to make quite a bit. We don't know from this how generously the more modest people in the various states give--we're only looking at the upper-middle and upper crust of each state. Anyway, here's the equation:

AAGI rank - Itemized charitable ded. rate = generosity gap

The CFP then takes each state's gap and ranks them against the other states (so, if a state is the fifth wealthiest but only gives the 25th most, it gets a -20 (5-25)--that's bad. If the state is the 25th wealthiest but gives the 5th most, it gets 20 (25-5)--that's good.) From these gaps, the states are ordered accordingly--the highest gap score (which will be a high positive number like 30) is considered the most generous state, and the lowest gap score (a numerically high negative score like -30) is considered the least generous.

The index is problematic in its computation. Take Conneticut, the highest earning state in the country, to illustrate: Using the formula, we see:

AAGI (1, as it is the highest earning) - Conn avg item charitable giving = gap

Without even telling you how Conneticut ranks in charitable giving, do you see a problem here? The best the state can hope to get, if it is the biggest giver in the country, is a gap of zero. Intuitively you may have realized that the total gap of all states combined is going to average zero (some having a positive (generous) score, some with a (cheap) negative). Thus, all Conneticut can hope for is to rank smack in the middle, even if it gives the most. Conversely, Mississippi, the nation's poorest state, can do no worse than ranking smack in the middle (AAGI 50 - Avg giving 50 = gap of 0).

Not suprisingly, Mississippi came in first overall (highest gap score of 45). And Conneticut finished a lousy 44th (-25 gap). So the index is rigged heavily in favor of poorer states--the entire South, the poorest region in the country, is within the top 50%.

A more accurate indicator of giving, (at least for the upper crust of each state that this report included), is to take the total amount of money each state gave in itemized charitable contributions and divide that by the number of people in each state who gave. (Ex: If in state A there was $1,000 total given and ten people who gave, this would come to $100. In state B, there's $500 given but twenty people give, and we get $25.) Graciously, CFP has their excel data available. Running the numbers this way puts Utah way on top, $2,110 (Mormons are apparently magnanimous people). The next closest is New York at $1,440.

But that's still not quite fair, because making $200,000 in New York is not comparable to making $200,000 in Utah. Our Mormon buddy is going to find it easier to dole out the cash, because after the cost of living takes its toll, he has more money leftover than the New Yorker. On the flip side, there are more people who make big big money in New York than in Utah, who even with the high cost of living have a chunk of change to potentially give out.

Thus, we need to take standard of living into account. That is, if people live in a place like Minnesota, where income is high relative to the cost of living (great standard of living), they should be expected to give more than people in Cali, where income is low relative to the cost of living (austere standard of living). Throwing that into the mix, here's how the state's come out (this isn't perfect and slightly favors states with more income inequality, but in my estimation it's much more accurate than the way the data has been presented by the CFP):

1 Utah
2 New York
3 California
4 Maryland
5 Alabama
6 Connecticut
7 New Jersey
8 Georgia
9 Oklahoma
10 North Carolina
11 South Carolina
12 Wyoming
13 Arizona
14 Virginia
15 Mississippi
16 Hawaii
17 Oregon
18 Massachusetts
19 Idaho
20 Arkansas
21 Florida
22 Tennessee
23 Colorado
24 Nevada
25 Delaware
26 Minnesota
27 Rhode Island
28 Kentucky
29 Illinois
30 Michigan
31 Montana
32 Pennsylvania
33 Louisiana
34 Washington
35 Kansas
36 Nebraska
37 Missouri
38 Texas
39 New Mexico
40 Ohio
41 Iowa
42 Wisconsin
43 Vermont
44 Indiana
45 Alaska
46 New Hampshire
47 South Dakota
48 Maine
49 West Virginia
50 North Dakota

Utah still comes out on top, but just by a hair. Sheesh, 35th--I'm a little embarrassed :)

I'm going to do a little more with this, but at first glance there doesn't seem to be any clear geographical edge, although the bottom states are mostly red. However, blue states tend to have more income inequality than red states--I'm going to adjust for that next and then I'll post the list with the difference between mean and median income taken into account.

It might be brought up was that more people in Mass gave than in places like Mississippi. This is not surprising, because nominally people in the Northeast make more than people in the South, and the federal tax guidelines do not take buying power into account (it's easier to come up with $10,000 of expenses in the NE than in the South b/c it costs more to live there and you're making more). But with the SOL taken into account, the disruption this causes in the data should be attenuated substantially.

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