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America’s Newest Tax Reform — Good or Bad for Charity?

Three ... two ... one. Happy New “tax” Year! Or is it? That’s the $13 billion question facing the network of nonprofit organizations in the US. 

The new tax law officially went into effect on January 1, 2018. It’s the first major tax reform since 1986, and depending on who you listen to or what you read, you’ll likely get wide-ranging opinions as to whether the newest tax reform will ultimately prove to be good or bad for America’s charitable sector.

Understandably, there is a great deal of anxiety throughout the nonprofit sector as nonprofit executives and fundraisers alike are looking for clues to how the new law will impact their organization’s revenue. The fact is, no one knows for sure – not in 2018 and certainly not in the years that follow. But we need to all accept that there is a real possibility that individual giving behaviors will continue to evolve and be further influenced by the change in the tax law. What we do know is that more than ever, we’ll need to analyze the data, look at the facts, monitor individual giving behavior very closely, and then react accordingly.    

Here’s a balanced summary of how we believe the new tax law could potentially impact all those who engage in charitable activities — as an individual donor, an employee or volunteer of a nonprofit organization, or someone who benefits first-hand from the work and mission of America’s charitable network.  

On one end of the spectrum is the report from the Indiana University Lilly Family School of Philanthropy that estimates the new tax law could result in a decline in annual individual giving by as much as $13 billion (3.4%) and $130 billion over the next decade, a decline comparable to revenue decline during the 2009 “Great Recession.”    

The core of its projection asserts that because of the structure of the new tax code, more than 28 million fewer Americans will itemize their tax returns, which will translate into reduced giving throughout the overall charitable industry. It isn’t expected that people will stop giving altogether, but rather without the incentive of a tax benefit, a large percentage of people will give less money to charity overall, either with fewer gifts or lower gift amounts.  While the report suggests that all organizations could be impacted by varying degrees, those that rely on contributions from moderate-income individuals are likely to be more susceptible to tax reform than those organizations that thrive on the extreme generosity of smaller subset of individuals who make large annual contributions.  

This doom and gloom forecast isn’t universal by any means. In fact, there is a large contingency of industry leaders who have a more optimistic outlook for the overall industry; not because of the new tax law, specifically, but rather the demonstrated generosity of Americans throughout out the nation’s history. They are quick to point out there have been past tax code changes over many decades, yet individual giving patterns have remained relatively constant – about 2 percent of personal income.   

In theory, the new tax law was designed to create a new model to drive economic growth throughout the country, by providing every household with more personal income. Those who believe the tax plan could help charitable giving are banking on the consistency of consumer charitable behavior. They believe the formula for success is simple — more personal income means more money to charity.

Indeed, the economic outlook for the US continues to look healthy, as the forecast for the upcoming year looks strong — carrying expectations that with the continued growth of the overall economy, charitable giving will continue to increase proportionally. This outlook is based on the growth in average annual individual income and a positive consumer outlook.

History has a way of repeating itself, and if indeed that’s true, nonprofit executives need to look no further than to understand how the 1986 tax reform impacted charitable giving. The good news is that the dire predictions of long-term declines in revenue have never materialized, but not without short-term ramifications. Similar to 1986, there was a predictable surge in final 2017 giving, as individual donors were encouraged to make those last minute “tax-deductible” contributions. While that was great for 2017, the associated consequence to “pre-giving” 2018 gifts means individual charitable giving is expected to decline in 2018.  

It will be critical to watch what happens in 2019 and beyond. Our opinion is that tax reform is not a threat to the stability of American charities, and we expect the impact on long-term revenue to indeed be significantly less than what some sources are predicting. But nonprofits can’t sit back and relax.

We believe that most people generally give because they care, because they are inspired, and because they are motivated to do so out of the goodness of their hearts —not because of a personal tax benefit. It’s unlikely that a change in tax law will significantly change their behavior. Could some give less? Absolutely! Which is why it’s up to us to give them compelling reasons not to give less, but to indeed give MORE.

Remember that people give to people, and people give because they are asked. As fundraisers we must not forget we are in the people business and our success will ultimately be defined not by campaign performance or tax reform, but rather through our ability to develop and create valuable relationships with individual donors.  

Quick Hits on Potential Impact of Tax Bill on Giving:

  • The prevailing expectation is that organizations should brace for a decline in overall individual in 2018, due to the surge in 2017.
  • Some expect giving could decline $130 billion over the next decade, whereas there are those who believe that individual given will rebound to expected levels beginning in 2019 and beyond — citing historical giving behavior.  
  • Organizations that are most likely to be impacted by tax reform include those that depend on gifts from moderate-income households; nonprofits in this category include faith-based charities, those that serve local community programs, and services and disaster-relief organizations.
  • Nonprofits that are expected be impacted the least include those who thrive on gifts from a lower volume of very generous high-income individuals, such as the arts and higher education.
  • Only 30% of US households itemize their deductions; households that do itemize their taxes tend to be much wealthier than the average household; 80% of those who do itemize give to charity. Industry experts believe tax reform will reduce that percentage to only 10%, which is the primary basis for gloomy long-term charitable giving forecast.  Because the majority of taxpayers are expected to take the standard deduction, the concern is that most taxpayers will have no financial incentive to give to charity.
  • More than half of high-wealth households report that the benefit of tax savings induces them to give to charity; while a change in tax policy would not impact their giving, as their motivation is not driven by tax benefits, they would likely give less if they received NO tax benefit. The good news is that the charitable deductions aren’t going away; the rules governing charitable giving are undergoing only a few changes, one of which is considered good for charities — the limit for individual cash donations increases from 50% to 60%.
  • Three in four people and 63% of wealthy households indicate they are motivated to give because they either “want to make a difference,” “want to give back to the community,” and/or receive “personal satisfaction” from doing so.