The Taxman Cometh, Part 3: A Way Forward
We’ve discussed the nonprofit tax debate over the past two days; now it’s time to talk implications. There are a few roads that lead from here, all with their pluses and minuses.
Ignore the new rules. Do what you’ve been doing. Maybe people will still think their gift helps them on their taxes, even if it doesn’t. It’s an option, but I would argue a suboptimal one.
Play by the new rules. In November, I looked at what we should do differently if there were no tax deductibility. The short version is it may allow us to focus more on why donors actually give.
Tax deductibility isn’t a real reason to give; it’s a way that charitable giving gets cheaper. Or, under this new tax law, doesn’t get cheaper for many. Thus, if tax deductibility is a benefit you are mentioning, think of what else you can do with that space. As The Whiny Donor Twitter account says:
Kinda surprised at the reply form in today’s mail that wants me to check a box that says “Enclosed is my tax-deductible gift,” because I don’t think that’s going to be a factor for me anymore.
— The Whiny Donor (@thewhinydonor) February 10, 2018
It’s part of why I hate spending three days writing about tax implications in The Agitator, as necessary as it is.
We have big fish to fry. Donors who love us and are connected to us will not abandon us if times get tough. Those who like us and send a check every so often will. We can refocus on moving from the latter to the former by changing who we are, taxes be damned.
Change the rules. I had the pleasure of working with a great MADD public policy volunteer named Nadine Milford. If it’s a drunk driving law in New Mexico, she probably helped pass it. Conscious of the rules on nonprofit electioneering, she would say “I can’t tell you who to vote for. But I can tell you if you keep sending me who you’ve been sending me, you’re going to get what you’ve always got.”
This is a tax bill. There have been tax bills before. There will be ones after. Gear up.
The idea I like best for charitable deductibility is universal, above-the-line deductibility. The reason that the government makes charitable gifts tax deductible is that gifts are good. Therefore, we want to subsidize them. It’s little different from tax breaks for savings for college or certain retirement savings or flexible health care sending accounts.
Now, look at where we are. You have two donors, one who makes $50,000 per year and one who makes $50,000,000 per year. Both give you $100.
For the $50K donor, that donation costs $100. S/He will (almost certainly) get no tax break for doing so.
For the $50M donor, that donation costs $70ish. This person will get a break on her/his taxes for having made the gift.
So it’s better and easier for the millionaire to give. Now, which conduct is better: giving $100 of $50K or $100 of $50M?
It follows, then, that we would want to subsidize these two donations equally, which would mean deducting charitable gifts from income before other deductions (and/or the standardized deduction is taken).
There’s bipartisan sponsorship for such a bill, and estimates by Independent Sector say it would increase giving by a gross of $17.9 billion, which more than wipes out any potential negative impact on giving from the current bill. It rewards the behavior we want as a society to reward up and down the income spectrum.
Melt down the new rules and fire them in the forge for the weapons of our liberation. I’m clearly overhyping this for effect, but only sort of.
We discussed above that we got tax deductibility because giving is a societal good. But it’s also linked to chains we voluntarily put on. That is, in exchange for having donations be tax deductible, we agreed to make sure that Nadine Milford didn’t engage in electioneering.
That’s the bargain that nonprofits struck for tax deductibility under the 501(c)3 structure: we will not be political organizations. We won’t electioneer. We won’t donate to political candidates. We won’t endorse candidates. We will have skeleton paid lobbyists.
If that deal is off on one side, it’s off on both sides: we need not fight political fights with both hands tied behind our backs. That is, we can shift from (c)3 organizations to (c)4s and mix it up.
Government action, or inaction, can be a significant headwind or tailwind to our missions. And if what we’ve traded the volume of our voice for is no longer valuable, we can take back that trade. There is a point – and I don’t know if it’s this point – where sticking to the (c)3 rules is more hindrance than help.
At the very least, the thing I would recommend is what I always recommend: a renewed focus on your donors. Everyone in the charitable sector is playing by the same rules. You can make sure that you come out of this a winner regardless of any other efforts going on for or against the sector.
Nick
7 responses to “The Taxman Cometh, Part 3: A Way Forward”
Behavioral Science Q & A
Integrating an individual giving appeal with other communications from a charity can have both positive and negative effects, and the outcome largely depends on how it’s executed. Advantages of Integration Brand Consistency: Maintaining a consistent appearance and messaging across all communications can reinforce the org’s brand identity and strengthen brand recognition and trust among your […]
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I’m not aware of any in-market tests specifically comparing recurring vs. gift frequency language. I suspect the answer might not be the same with all gift frequencies, nor with all people. It sounds like a great opportunity for you to test and find out what works for your audience. Based on the literature, here’s a couple […]
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Based on what we know from existing data, those renewal notices can actually be pretty effective in getting people to donate. They tap into our psychology – creating a sense of urgency, reminding us of past support, and using personalization to make the message hit home. They’re playing on our natural tendencies to feel obligated […]
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Interesting question. I had a quick look at the testing done on this topic. On the positive side, in all cases, over half of donors decide to cover the fee. In some cases, it goes as high as 65%. Not a negligible percentage at all. Here’s another test from iRaiser showing consistent results (see point […]
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There’s just one thing to consider when designing a supporter journey: the supporter. More specifically, you need to take into account: Who the supporter is i.e. their identity, which is the reason they support this cause, and their personality, which describes the way they “see” and process the world. These will determine the kind of […]
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I’m not an expert in this but a quick search surfaced this article on the effect of tax reforms on 2019’s charitable giving. The researchers didn’t find a reduction. Actually, they observed an “increase in charitable contributions in 2019, even with the lower tax rates and the dramatically smaller number of taxpayers who itemize their […]
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I’ve been waiting to weigh in until I read all three articles. I feel strongly that while tax deductions are icing on the cake, donors really want the cake. And that’s what nonprofits should sell. Let’s use this new tax law as impetus to double down on solid, donor-centered fundraising fundamentals. Yes, giving is good. It makes donors feel good. MRI studies have shown the mere contemplation of giving lights up our pleasure centers and gives us a “warm glow” shot of dopamine. That’s what we should sell, not tax benefits.
That being said, a little icing never hurt. And there are benefits lurking in the new tax bill. Like the increase in deductibility from 50% to 60% of AGI. And the benefits that remained, like the ability to avoid capital gains taxes on gifts of appreciated property. And the opportunity to gift up to $100K directly from an IRA and not be boosted into a higher tax bracket solely because of a minimum distribution requirement. So, when you meet with major donor prospects (those who’ll be itemizing regardless of the increased standard deduction because they give more than that), make sure to let them know about this “frosting” on their cake.
For everyone else, don’t go there. The main giving motivators have nothing to do with tax savings. I’ve written about this https://clairification.com/2018/01/09/new-tax-law-worried-nonprofit/. Folks might also enjoy listening in on a podcast interview Jeff Brooks and I did on the subject. https://clairification.com/sign-hear-new-us-tax-law-fundraisers-sky-not-falling/
Thanks for always shining a light. 🙂
Hi! I’m back to comment again. I apologize in advance for the length of my comment.
Nick, I want to point out that we do NOT have both our hands tied behind our backs when it comes to the political arena; we just have one. 🙂 501(c)3 organizations are permitted to advocate for particular policies even though they cannot endorse specific candidates.
Furthermore, 501(c)3 organizations can encourage their major donors (often major donors to political candidates) to encourage the politicians they support to advance philanthropy-friendly legislation.
501(c)3 organizations can also encourage all supporters to email and/or call and/or visit political representatives to advocate for philanthropy-friendly legislation. As you know, there are technologies that make this easy though not without cost.
Fundraising professionals are also free to engage in advocacy as private citizens. In addition, fundraisers, who are US citizens and members of the Association of Fundraising Professionals, can contribute to the AFP Political Action Committee. The AFP PAC donates to the campaigns of Federal House and Senate candidates friendly to the nonprofit sector. (In the interest of full disclosure, I was a founding board member of the AFP PAC and served a term as board chair.)
While more is better, in terms of contact and money, surprisingly small amounts of either can have a significant impact on the Hill.
I also want to point out that a number of organizations including AFP and Independent Sector are working together as part of the Charitable Giving Coalition. We should all do what we can to strengthen the Coalition so it can more proactively and more effectively represent the sector in the future.
Finally, I suspect most nonprofit organizations can more than offset any potential downside from the tax code by simply doing a better job. For example, if more organizations had a robust planned giving program, if more organizations offered a monthly giving option to donors, if more organizations built stronger relationships with donors, etc., significantly more money would be raised.
During the Great Recession, the Human Services sector took a massive philanthropic hit and took time to recover after the recession. At that time, I served on the board of the Philadelphia Children’s Alliance, a small charity bringing justice and healing to survivors of child sex abuse. PCA took a hit, though not as bad as the broader sector. Despite the recession, we decided to march forward with a new strategic plan to meet 100% of the need in the community. We hired more staff and diversified funding sources. In 2009-10, PCA saw an increase in philanthropic support of 8.5 percent compared with 2008-09, and an increase of 16 percent compared with the pre-recession fiscal year of 2006-07! The following year saw a further increase of about 13 percent. My point is that a bold vision that is well articulated and paired with sound fundraising practice can yield great results regardless of external forces. We need to take control of our own fundraising destiny rather than use the new tax code as a handy excuse for a missed goal.
Claire, agree 100%.
Michael, I take your point and will meet you in the middle – we have 1.4-1.6-ish hands tied behind our backs. 🙂
One of the great challenges is the often byzantine rules around lobbying. For example, you mention fundraising professionals can electioneer in their private capacity — it’s true unless it’s a person like a head of communications or CEO who is identifiable as a face of the organization. You can collect petitions on bills, but if you do it by mail, you best not put the bill number on it because that’s then a lobbying cost that counts toward the $1M cap on lobbying. And yet, it’s worth it to strive, to seek, to find, and not to yield the field of policy.
And agree that the way to offset this is to create deeper relationships with more donors. It would be great if we can get a fix (or what I would consider a fix) on universal deductibility and we should IMHO advocate for it. But this is a Tin Man’s heart scenario – what we need has been with us the whole time.
Thanks – this is very helpful. The new tax rules came up at my church’s annual meeting in January, with people who are taxpayers but are not CPA’s or fundraisers sharing lots of misinformation. This will help our officers educate our members.
Thanks, Joan – glad it was helpful!
I disagree with Nick’s point, to a point, about the role of “tax deductibility” in donor communications. As he advises, I certainly would not say “here is my tax-deductible gift” when for many more folks it will not be so. On the other hand, there is some measurable (I know somebody measured — just can’t recall who) branding bootstrap that comes with being able to say “we are a 501(c)(3) organization and gifts to us are income-tax deductible as charitable contributions.” Rightly or wrongly, many perceive this status as a badge of credibility and authenticity. I don’t think it cynical to display the badge.
Thanks, Robert. I’d be curious to see the branding boost that comes from being able to use the tax-deductibility badge, if you or another reader can surface it. My thought would be that there would be a better closing argument, as it were, on the reply device, PS, etc., that gets to the emotion of the appeal or the identity of the donor.
But the studies I’m aware of deal more with the deductibility itself (and price elasticity and those things I vaguely recall from freshman microecon) than the messaging, so I haven’t seen that effectiveness data and thus could be wrong.
Have you seen success using the term 501(c)3 with the general public? For my money, it’s not a term I assumed a lot of laypeople know and people certainly search it less than nonprofit (https://trends.google.com/trends/explore?date=today%205-y&q=501%20c%203,nonprofit), so I’d leave it out of the explanation.
But your point is taken that you can talk about the tax-deductibility of the organization rather than of the gift. Interesting – thanks!