Collateral Damage

by | Feb 27, 2017 | Al's Observations | 6 comments

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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