The Taxman Cometh, Part 1: The Downside of the 2017 Tax Bill for Nonprofits
We’ve had a few reader requests to talk about the nonprofit implications of the new tax bill.
The trick in meeting this request is that 1) smart people on this issue disagree and 2) I’m not one of the people in #1. So I’ll try to lay out the gloom and doom case today, the silver lining case tomorrow, and an argument for a way forward two days hence. (All without editorializing on the non-nonprofit aspects of this as much as possible. Wish me luck)
First, an explanation. The new tax law increases the amount you can take as a standard deduction on your taxes. What you would normally do is prepare your taxes both ways and see whether itemized deductions or standard deductions would have you pay less in taxes.
(I assume almost everyone is trying to minimize, not maximize their bill. I can’t remember who said it and thus can’t cite it, but there’s a great quote along the lines of “I know that taxes are the price I pay for civilized society and I am honored to pay them. I also could be just as honored for half as much.”)
If the standard deduction is bigger than itemized, fewer people will itemize. This means fewer people will get any tax benefit from donating to charities. Specifically, the Joint Committee of Taxation estimates that 28 million fewer people will take a charitable deduction, falling from about 30% of taxpayers to about 5% of taxpayers.
This leads to Worry #1: fewer itemizers means donations will fall. Tax-deductibility isn’t the primary reason most folks give – rather it is a subsidy for giving. But we know that subsidies matter. Witness what happens when you run a matching gift campaign – more people give, because they know that they will have a greater impact with their gift, and the average donation (usually) drops, as people also know they can have the same impact they would have had for less money.
That sounds bad, especially for one who works in the nonprofit sector. But it could be worse, because of Worry #2: people will see behind the curtain. For better or worse, we’ve gotten away with the assumption people have that their gift helps them on their taxes, even if they don’t see that at the end of the year. This may be a part of the optimism I love about many Americans; as Ronald Wright put it “Socialism never took root in America because the poor see themselves not as an exploited proletariat but as temporarily embarrassed millionaires.” We usually believe we are, or will be, better and richer than we are. As a result, you can think you are in the top 30% of taxpayers if you are really in the top 80%.
It’s harder to do that with the top five percent. This could be the step that punctures what has been partly an illusion for many smaller donors.
Worry #3 – estate tax changes will also decrease giving – has in my opinion been under-covered. Estate taxes apply only to the very wealthy. The exemption has been moved from $5.5 million to $11 million estates, meaning estates will also have less incentive to donate to charities.
The Joint Committee of Taxation estimates these three worries mean a drop of $13 billion or more in charitable giving and the loss of 220,000 to 264,000 jobs in the nonprofit sector.
In addition to the implications for the sheer amount of giving, there’s also a shift in giving. This leads to Worry #4: this will accelerate the trend of giving by the very wealthy. Pareto is already a wimp; 80-20 is a distant memory. Rather, four percent of donors give 76% of donations; the top third of donors give 96% of revenue.
And this trend has been growing for years. The Institute for Policy Studies found that:
- Contributions from people who make $10 million or more have gone up 104% between 2003 to 2013.
- From those who make $100K+, they’ve gone up 40 percent
- From those who make under $100K, they’ve decreased by 34 percent
This could have several implications. First, centralization of donation money could also mean the centralization of control. Nonprofits have already worked to avoid changing themselves for large funders (including grantors); this would mean increased pressure to do so. Second, reliance on fewer funding sources is inherently less stable. Even if there is no pressure, if one or two large donors leave, you are in trouble.
Third, we are pushing for a culture of philanthropy. I believe (for what it’s worth) that charity is a value instilled from early in life. If a generation of all but the wealthiest do not get those values and nonprofits are trained to go deep not wide, the future of philanthropy is in peril.
That’s hyperbolic and certainly not attributable to one tax bill. But it’s a vision of a potential future if we do not act –and if we are complicit in not sharing the real values of philanthropy ourselves.
BUT… there’s a chance this may not as bad (or bad at all). We’ll discuss that tomorrow.
Nick
4 responses to “The Taxman Cometh, Part 1: The Downside of the 2017 Tax Bill for Nonprofits”
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Justice Oliver Wendall Holmes.
Estimate say the number of itemizers will go from 37M to 16M. However, as you point out, that’s not the reason must people donate to nonprofits.
The mission and values are still the major motivator.
The tax and wealth advisors are suggesting “bunching,” to middle class donors, giving three years of donations in one year and itemizing, then taking the standard deduction for the next two years. This is problematic in terms of continuity. The other solution is to create a DAF and doing something similar.
Too early to tell. We need to wait for the number and take your advice on what to do.
Nick, regarding the quote you cited, Arthur Godfrey said, “I’m proud to pay taxes in the United States; the only thing is, I could be just as proud for half the money.” Oliver Wendell Holmes wrote, “Taxes are what we pay for civilized society.”
Now, I’ll look at the worries you’ve enumerated:
Worry #1: fewer itemizers means donations will fall. In the past, people had to do something (e.g., donate money) to get the tax deduction. Now, most people will NOT have to do anything to get the deduction; they’ll get it in advance of or without doing anything. So, it’s not really accurate to say that giving has become more expensive since donors will still get a tax deduction. Looked at another way, people will have more money as a result of the standard deduction. Since people give from disposable income (at the rate of about 2%), the standard deduction could result in stable or increased giving. While the aggregate number is big, on an individual basis, the value we’re talking about here is fairly tiny for most donors.
Worry #3 – estate tax changes will also decrease giving. The estate tax change may affect giving, but how and how much is uncertain. First, only a tiny number of people will be affected by the changes. Second, many states have estate taxes. Third, people may simply change how they donate. Also, other planned giving opportunities remain, and some have been enhanced, in the new tax code. See. researcher Dr. Russell James’ article: https://www.linkedin.com/pulse/how-2018-tax-law-increases-charitable-giving-russell/
Worry #4: this will accelerate the trend of giving by the very wealthy. Historically, 75% of donations by wealthy individuals have never been deducted. Lower-income people have been highly generous, relative to other income groups, despite having received little or no tax benefit. So, when it comes to cause-and-effect, tax policy may not have much of an impact on this issue. Instead, the decline in volunteerism, decline in religious affiliation, decline in social capital, increase in government social welfare programs, etc. may play a much larger role.
As you might guess, I have a lot more to say on the tax issue. But, I’ll wait to read your post tomorrow before deciding whether to comment further.
Jim and Michael, thanks for well-formulated thoughts. Jim, I agree bunching is a way for people to get around this, especially in the context of donor-advised funds.
Michael, I agree of most of what you said; I stand by that giving becomes more expensive in worry #1. Your point that people will get the standard deduction regardless of whether they give is correct for their overall income. But this is the difference between getting cash versus a coupon. Yes, both are money in your pocket. But the coupon can only be activated if you buy from a certain vendor.
Same is true for charitable giving. People who itemize get credit for their charitable donations with a deduction; they wouldn’t get that credit if they don’t donate. If they no longer itemize, they get the same credit whether they donate or not. Thus, there’s no *marginal* tax benefit for someone who doesn’t itemize and fewer people will itemize; therefore the cost of giving goes up for those people, as they no longer get those benefits.
On Worry #4, definitely agree with those trends are larger and more important. I do worry about a structure where the vehicles by which charitable giving is subsidized go mostly to the wealthy (e.g., itemization, bundling, DAFs, etc.) for both who gives and how charities solicit who gives. Estates are an exception, but your ability to contribute to the culture of philanthropy is limited once you are giving via your estate. A minor part of a larger trend, as you say.