Nonprofits Worry As Evidence Mounts That 2017 Tax Cut Led to Less Giving
WASHINGTON – The nonprofit community tried to warn Republican lawmakers on Capitol Hill that the 2017 tax bill would hurt charitable giving.
Now, nearly 20 months after President Donald Trump signed the Tax Cuts and Jobs Act into law on December 22, 2017, all signs point to those fears being realized.
“The predictions were that charitable giving by individuals would decline by 4% to 5%,” Howard Gleckman, senior fellow at the Urban-Brookings Tax Policy Center, recalled during a recent interview with The Well News.
The latest edition of Giving USA’s’ annual report — the most comprehensive yearly study of philanthropy — found overall charitable donations dropped an inflation-adjusted 1.7% in 2018, and giving by individuals went down 3.4%.
Though the drop was slightly more modest than the predictions, “it’s real nevertheless,” Gleckman said.
In dollar terms, that decline in individual giving comes to about $10 billion — more than the combined operating budgets of the American Red Cross, Goodwill Industries International, Inc., YMCA of the USA, Habitat for Humanity, United Way Worldwide, Catholic Charities USA, and American Cancer Society.
The numbers show 2018 was the first year in the past five that giving has dipped. Those who work in the nonprofit sector say the troubling findings are in line with those of other recent surveys.
“By and large we are hearing about decreases, some small, some large,” said Rick Cohen, a spokesman for the National Council of Nonprofits. “It will all make a difference. And we are hearing some folks say that they changed their giving behaviors because of the tax law. And, you know, if that’s the case, if that’s what the data are indicating, then it’s something we’re even more worried about this year.”
Tax Bill Was A Double Whammy
Ben Kershaw, director of public policy and government relations at Independent Sector, a coalition of nonprofits, foundations and corporate giving programs based in Washington, said for nonprofits that depend heavily on individual charitable giving, the 2017 tax bill was a double whammy.
First, because by lowering the tax rate and increasing the standard deduction, it reduced an incentive to give to charity.
Second, because it increased the maximum charitable deduction to 60% of adjusted gross income, it provided an incentive for high net worth individuals to give, but basically ignored the existence of the millions of Americans who previously itemized their taxes to help balance their charitable giving with their cost of living and other expenses.
“Prior to the tax cut being passed, the nonprofit sector spent a considerable amount of time and energy telling lawmakers, ‘It’s all well and good to preserve the charitable deduction, but if no one is going to be left itemizing their deductions, charitable giving will go down,'” Kershaw said.
“At the same time, I think the way the 2017 tax bill was written, it sent the message that charitable giving is only for a select group of Americans,” he added.
According to the Tax Policy Center’s Gleckman, the decline is most notable among middle income people, a population in which individuals give $100 to $500 in a typical year, because that population also happens to be the most sensitive to tax changes.
Compounding the alarm felt by the nonprofit community is an overall decline in the number of Americans who regularly give to charity, a trend that predates passage of the Tax Cuts and Jobs Act.
This is the first year that giving by individuals has fallen below 70% since at least 1954, according to the Giving USA report.
“Our fear is that this trend has been accelerated by the 2017 tax bill,” Kershaw said. “That’s a major concern for Independent Sector because of what it could mean for the future pipeline of charitable givers in America, and by extension, what effect that could have on civil society.”
“That’s why the nonprofit or charitable sector continues to spend a lot of time urging Congress to make the tax code fairer and to give every American, regardless of their income, an incentive to give to charity,” he said.
Kershaw said to their credit, a number of lawmakers have heard the call and introduced legislation to repeal provisions of the of the 2017 Republican tax bill that have placed undue burdens on nonprofits.
He pointed specifically to a bipartisan bill sponsored by Representatives Henry Cuellar, D-Texas, and Chris Smith, R-N.J., the Charitable Giving Tax Deduction Act, which would make charitable deductions universal and above-the-line, meaning that taxpayers can deduct charitable donations from their taxes whether or not they choose to itemize.
Among the other lawmakers trying to get the nonprofit community on stronger, more predictable footing are House Majority Whip James Clyburn and Representative Carolyn Maloney, D-N.Y., sponsors of the Nonprofit Relief Act of 2019.
Clyburn and Maloney say their legislation would repeal the new tax that requires nonprofits to treat every unrelated business revenue stream as a separate “trade or business” that may not be aggregated with other profits and losses in calculating tax liabilities.
The bill also extends the paid leave tax credit to tax-exempt organizations and changes the tax treatment of mileage reimbursements to volunteers, so they are not subject to federal and state income taxes.
“So there’s hope,” Kershaw said. “We strongly believe the charitable sector is better able to address the needs of America if it’s supported by the broadest possible swath of the American public.”
Things Could Get Worse
A lingering concern is what will happen next year. Economists who focus on the nonprofit sector believe that while the tax bill received a lot of media attention when it passed the Senate and was signed by the president, few people ever actually read it.
“As a result, the reality of what the bill actually meant for them didn’t hit them until they filed their taxes this year,” Gleckman said. “The concern among economists is that taxpayers come to terms with what the law actually means to them and their financial situation, there will be an additional pull back from giving next year.”
“It’s my sense that the local museum and symphony will probably be okay because a large percentage of their givers are high net worth individuals,” he continued. “The nonprofits that are going to really feel the impact of the tax bill are the local food banks, senior citizens organizations and the like.”
Gleckman said there are only so many things nonprofits like these can do in response.
They could cut spending or seek more grants, but the most important thing they should do is talk to their donors about how the 2017 tax bill — and other economic factors — have affected them.
The changes wrought by the 2017 tax bill aren’t the only factor weighing on charitable giving, he said. There are a lot of other factors — like the stock market, which was particularly volatile towards the end of last year, when most charitable giving occurs.
The most volatile period in 2018 also aligned, unfavorably, with the 2018 giving season, with stocks plunging from mid-October and culminating in the Dow and S&P recording their worst December performance since 1931.
Giving USA has found a statistically significant correlation between changes in total giving and changes in the stock market.
Considering that nearly one-third of annual giving occurs in December and 12% of all giving happens in the last three days of the year, 2018 is an example of that research come to life.
What that suggests, Gleckman said, is that there “has to be a change in how we promote charitable giving.”
“So much of the marketing to donors is tax related, which is why nonprofits get a slug of money at the end of the year,” he continued. “What needs to happen is we have to train people to give throughout the year, so your organization isn’t flush at Christmas and starving in June.”
The Foundation Perspective
Henry Berman, CEO of Washington-based Exponent Philanthropy, the country’s largest association of funders and formerly known as the Association of Small Foundations, said getting a reliable read on where things stand now is complicated by the very aggregate of factors Gleckman mentioned.
Generally speaking, foundations have not been affected by the 2017 tax law the way individual donors have, he said. On the other hand, the volatility of the stock market has been a factor.
“Foundations, in the simplest terms, are required to pay out 5% of their year’s assets, which makes our giving kind of a trailing indicator,” Berman said. “If you look back at 2017, the markets were generally up, and that meant, generally speaking, that distributions from foundations were up in 2018.
“In 2018, by comparison, the markets were down for the most part, and it follows that in 2019 distributions to nonprofits were down. This despite the fact many foundations, recognizing there could be a decline in donations from individuals, stepped up their giving to help people with that,” he said.
The challenge for foundations and nonprofits alike is that the needs they serve are always growing and uncertainty over how to meet those needs is unabated, Berman said.
“There are more people who are disenfranchised — however you want to take that — who need help and support … and that’s why I think funders, whether you’re a foundation or an individual, need to be much more thoughtful and smart about where they’re giving their money,” he said.
“Just writing checks doesn’t accomplish anything,” Berman continued. “People need to have a strategy, and one that begins with them saying to themselves, ‘these are my passions and these are the things I want to support.”
“But none of us can do this in a vacuum,” he said. I think there’s a lot of concern right now — and I’m saying this apolitically — about the volatility and uncertainty in Washington, which also has an element of gridlock to it.
“And that uncertainty is reflected in the economy,” Berman said. “I mean, every day it’s ‘Are interest rates going up, or are they going down?’ The markets are up right now, but as we’ve seen over the last several years, the markets have no problem taking a tremendous swing. So as foundations and nonprofits and as citizens we’re always in a state of ‘How close is the pin to the balloon?’
“I’m not an economist, but from what I read and what I hear, I think people are expecting a big hit at some point, and that’s not going to be good for anybody,” he said. “So that is worrisome, and I think some stability in the economy and the kinds of things we’ve been talking about would be a really good thing.”
Kershaw believes expanding charitable giving incentives would help that come about.
“Not just because it would make it easier for low- and middle-income Americans to give to charity, but because it would send a powerful message that charitable giving is just part of what it means to be an American and it’s something that is an American value. Right now, our tax code doesn’t live up to that,” he said.