Collateral Damage

People keep asking me: How is the current political upheaval going to affect nonprofits?

My first answer: I don’t really know. We’re in unprecedented political times. Who really can predict what will happen?

My second answer: That said, indications are that the next few years are going to be bad for charity.

Why?

  1. The Administration and Congress are threatening to remove all federal funding from certain charitable sectors. There are active proposals for pulling away federal funding for the Corporation for Public Broadcasting, a step that would undermine much of the work of PBS, National Public Radio, and the hundreds of local stations. Those in power also want to defund Planned Parenthood, which would devastate health services for less affluent women. Additionally, there is a call to end federal funding for the National Endowment for the Arts and the National Endowment for the Humanities, which would have a calamitous impact on thousands of cultural organizations. The groups directly affected by this budgetary sledgehammer face an existential crisis.
  1. Administration policies represent an assault on civil liberties and environmental protection. In reaction, donors are recognizing the need to increase donations for the American Civil Liberties Union, the Southern Poverty Law Center, and other organizations that work with immigrants, religious minorities, and the LGBT population; other donors are investing deeply in environmental and conservation groups.
  1. All of this is taking its toll on nonprofits by increasing competition for the charitable dollar. Charitable giving in the U.S. is not a zero sum game, where if Organization A raises a dollar, that means that one fewer dollar will be going to Organization B. But the fact is that overall charitable giving is remarkably stable from year to year, taking into account the condition of the economy. When more money goes to one sector, there is less available for others. I’ve heard many nonprofit leaders say, “I know we’re not the ACLU or Planned Parenthood, but we are desperately in need of funding too!” They say this with recognition that certain organizations are on the front lines, and deserving of special support, but also with worry and envy. (“If only our soup kitchen were under assault by the Administration,” they seem to imply, “we too could raise a boatload of money.”) This is setting up an inevitable but unfortunate competition among worthy charitable causes. Certainly, there has always been tacit competition for charitable donations, but now that rivalry is open and raw. Nonprofit leaders are worried, jealous, and conflicted.
  1. Perhaps most importantly, the nonprofit world is likely to suffer from the collateral damage of tax reform policies. This damage will not come intentionally or directly. But proposals to change the tax code all seem to reduce the incentive for individuals to contribute to charity. The problems here are less obvious, but more systemic, than those already listed.

Here are snippets of tax reform ideas being bandied around – and how they can hurt nonprofits:

  • An End to the Estate Tax. According to Giving USA™, fully eight percent of charitable giving last year came from bequests – more than $37 billion. Of course, not all charitable bequests are inspired by tax avoidance, but the estate tax clearly drives much of that giving. Through the years, I’ve heard dozens of donors tell me that they have charitable provisions in their wills “because either I choose where the money will go, or the government will!” If the government no longer threatens to takes its share, I’m guessing many donors will bypass charity and simply pass the funds on to the next generation.
  • An Increase in the Standard Income Tax Deduction. This sounds like dull accountant-speak, but it’s critically important. Currently, only 30% of taxpayers itemize their deductions. That’s because most taxpayers rely upon the “standard deduction” of $6,300 per person and $12,600 for a married couple. That’s what you can claim without listing any specific deductions, and that’s what most people use on their income tax return because the standard deduction is larger than the sum of they would be able to claim for mortgage interest, local tax payments, and other deductible expense, including charitable gifts. The Administration has been advocating increasing the deduction by nearly 150% to $15,000 per individual and $30,000 for a couple, which would vastly reduce the number of itemizers to a very small percentage of the population. I’ve written before about how only itemizers actually benefit financially from their charitable giving by being able to claim a tax deduction. Now there would be vastly fewer itemizers, and thus no incentive to give to charity for, say, 95% of the population. That can’t be good for nonprofits or their missions.
  • A Cap on Deductions. In exchange for greatly lower tax rates for top earners, the Trump Administration has floated the idea of capping deductions for taxpayers at $100,000 for an individual and $200,000 for a couple. This would serve to limit the incentive for wealthy donors to give large gifts. Would they still make charitable gifts? Of course. Would the size of their gifts drop? Undoubtedly.
  • Lower Top Tax Rates. The Administration is suggesting reducing the top tax rate from 39.5% to 33%. Other rates would drop as well. The problem with this (beyond the loss of tax revenue) is that the tax rate essentially equals the federal incentive to charitable giving. That is, if a donor is paying a 39.5% tax on her income, then a gift of $1,000 actually costs her only $605, because she will save $395 (39.5%) of the donation amount in her tax bill. If her tax rate drops to 33%, then that same gift will cost her $670, or $65 more. The donor’s accountant will likely tell her to rein in her charitable giving. The donor is likely to agree.

I’d love to share the secret for getting through these times – but there’s no simple solution. What I can say is that each of us should call our representatives and senators. We need to speak out against cuts to organizations we care about. Let your representatives know there will be a political price to pay for ideological budget slashing. And alert them to the damage the tax plans will wreak on charity at a time when these very same politicians are calling on nonprofits to carry more of the burden for serving society’s needs.

More generally, we need to think beyond ourselves. If you are on the staff or board of an organization facing drastic budget cuts or significantly increased needs, obviously you have to focus on your survival. But don’t forget the place up the street that faces a similar challenge, or entire charitable sectors that are threatened. A united voice against irrational and counterproductive policy, budget, and tax decisions – not simply the ones affecting you directly – will carry more credibility than a plea for your agency alone.

Together, we may reduce the damage. But will the next few years be bad for nonprofits and their missions? I’m afraid the answer is yes.

Copyright Alan Cantor 2017. All rights reserved.

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6 thoughts on “Collateral Damage”

  1. Thank you for this focus and clarity, Al. I am seeing Members of Congress responding to federal agency and other sectors by attempting to pit groups against each other. “Tell me why I should take funds from X and give them to you Y?” is a common response. It is important to note that X and Y are trying to coordinate and collaborate on a single issue. I still wonder when clean air and water became a partisan issue.

  2. Well stated. Many of us in the charitable sector have been organized to protect tax incentives for giving (including to donor-advised funds) for many years. The Charitable Giving Coalition raised the impact of your fourth point above (unintended consequences of tax reform on charitable giving) with over 150 Congressional offices earlier this month. We must advocate for ways to increase the incentives for giving such as an above-the-line deduction, changes to AGI limits and increases in the carry forward among others.

    1. Thanks, Steven. I appreciate your comment.

      One interesting and, to my mind, fairer way of encouraging charitable giving is to substitute tax credits for deductions. Any person, whether he or she is itemizing deductions or not, could claim a tax credit for a charitable gift — say, at the rate of 20%. So whether it’s a rich person (in a high tax bracket) or a person with lower income (and a lower tax rate), when either one donates $1,000 to charity, that person can claim a $200 (at 20%) tax credit, or a $200 reduction in taxes. People far smarter than I have been working on this, and they could explain it with greater effectiveness. I love that it provides an incentive to everyone to contribute. I also like that the benefit does not disproportionately fall on the wealthiest people (who itemize and are in the top tax bracket).

      But, of course, that’s not at all on the table, and we all need to keep what we can of the current incentives in place. For your work on that, Steven, thank you.

  3. I disagree with pretty much everything in this article.

    An enlightened tax policy will stop carving out deductions for this or that special interest and focus on growth, which will be a net positive for philanthropy. We need more billionaires to take the Giving Pledge, and part of how we do that is to create the conditions for more billionaires. Econ 101: when you tax something less, like individual or corporate income, you get more of it.

    Whether or not marginal tax rates and deductions really affect philanthropy is an open question in behavioral economics. I’m not a fan of raising the standard exemption either, but the amount of charitable giving that *might* be influenced by doing so is tiny. What is a historical fact, though, is that individual giving is consistently flat at “the stubborn 2%” of GDP. More GDP = more individual giving.

    Also — “Those in power also want to defund Planned Parenthood, which would devastate health services for less affluent women.” Oh please. There are at least three things wrong with this statement. (1) The legislation in question (e.g., Joni Ernst’s bill in 2015) explicitly states that the overall Federal funding available in support of women’s health will not be reduced — for every Planned Parenthood facility that loses federal funding there are a dozen or more providers that could see increased funding. (2) Title X funding is only about 25% of PP’s federal funding — the rest is Medicaid, which is a mix of state & federal funding, and is likely to continue. (3) Mix in the fact that PP is using this scare to fundraise like hell, and they might actually emerge financially stronger.

    This article is special pleading, not a serious policy analysis.

    1. Thank you for your thoughts. I appreciate that you are full-throated in expressing your opposition to what I have written. This adds a vibrancy to the debate, and it gives us a few interesting questions to discuss.

      I do understand that when people are taxed less, they have more to contribute. But I have to point out that for the past 40 years charitable giving has rung in at about 2% of the GDP year after year, despite vastly differing tax structures and, over time, a considerable drop in the income tax rates. I won’t argue with your point that when people keep more of their income, they have more to give away. But I haven’t seen evidence that, overall, they actually do that.

      I agree with you that if GDP grows, so too will charitable giving. The Administration is pushing the idea that the GDP will grow at 4% — though very few economists find that kind of growth credible. But even assuming that charitable giving grows at 4% along with the putative growth rate of the economy, will that make up for the cuts in funding from reduced governmental grants? I don’t think so. I’m sure you will disagree, which is your right.

      We can argue the behavioral economics of charitable giving. I am not a psychologist or an economist, nor do I claim to be, though I have very much enjoyed reading about the pioneering work of Amos Tversky and Daniel Kahneman on the subject. But I can certainly tell you from my 35 years of working with donors that they and their advisors are keenly aware of the tax advantages of charitable giving, and I have no doubt that reducing those advantages would lessen charitable giving by many. An Urban Institute study (“Effects of Estate Tax Reform on Charitable Giving”) estimates that, should the estate tax be eliminated, charitable bequests would drop 22% to 37%. We wouldn’t know for sure unless the estate tax is indeed repealed, but I’d rather not test that hypothesis.

      As for the Giving Pledge, I certainly applaud the billionaires who are committing to giving away a significant share of their wealth. That said, I will add two caveats. The first is that the Giving Pledge does not differentiate between outright giving to charitable organizations and giving to private foundations or donor-advised funds. I would argue (and over the years, at this site and in national publications, I have) that putting money into foundations and donor-advised funds for perpetual investment does not nearly impact society’s needs as strongly or effectively as outright giving to operating charitable organizations. Second – and here I know we will disagree once more – I don’t trust billionaires to distribute their charitable dollars in a way that is in the best interest of all. There is no recall mechanism for private foundations: unlike elected officials, foundation heads and boards cannot be thrown out of office. As some critics have described this, private foundations are a form of “massive plutocratic amplification.” You want there to be more billionaires, so that they could give away their money wisely. I think there are better routes to a healthy society: less disparity in wealth, and more opportunity for all. I’m guessing we both want the same end result: a healthy nation as assessed by various measures. But, politically, we veer toward very different ways of getting there.

      I never thought I would ever be arguing about reproductive health on my blog, but, well, I’m the one that raised the issue of Planned Parenthood, so I suppose I opened that door. I need to point out that the threats to funding for Planned Parenthood are not limited to Title X funding, but Medicaid as well. I will add that in many of the counties served by Planned Parenthood, there are no other “safety net” family planning providers, and that in many others Planned Parenthood is the dominant provider of reproductive health services to lower-income women. If these centers were to be driven out of business by the elimination of federal funding (which currently makes up 40% of Planned Parenthood’s budget), it is not as though other centers necessarily either exist to pick up the slack or would spring up to take their place. Organizations are built up over the years – facilities, staff, funding sources. Wiping out Planned Parenthood would create a tremendous void.

      Your final point is actually a reiteration of one of my own. Planned Parenthood (and the ACLU and certain other organizations) are indeed raising a boatload of money as a result of the actions of the Administration and Congress, which will leave less for the rest of charity. And for a vulnerable sector, cutting appropriations and rejiggering the tax system in a way that would hurt charitable giving not only gives me pause: it gives me nightmares.

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