This article is adapted from “The Rich Get Deductions and the Poor Get Ruled: A Burning Platform for a Universal Charitable Deduction,” from the Fall 2018 edition of the Nonprofit Quarterly.
For a while now at NPQ, we have been keeping an eye on a trend we were sensing beneath the findings of recent reports by Giving USA and others—that although more money than ever is being donated, fewer people are making donations. This works out to mean that high-income donors represent an ever-higher proportion of overall giving. We asked Patrick Rooney, executive associate dean for academic programs, and professor of Economics and Philanthropic Studies at IUPUI’s Indiana University Lilly Family School of Philanthropy, to confirm or deny that impression—and for the first time, we have firm corroboration of this trend, which should send loud alarms throughout the sector.
There are a number of problems with this pattern, as has been pointed out in numerous articles and books over the last decade. First and most simply, wealthy people generally give to different recipients than do the rest of us, and their priorities can run counter to what a community might want for itself. This becomes even more layered as a problem, of course, when the money being used for philanthropy has been made through the exploitation of others, and also when that philanthropy is used to influence public systems like our schools or even whole municipalities. The new pattern, many worry, is indicative of the rise of a philanthropic plutocracy, whereby eventually all systems are primarily responsive to the ultrarich.
The tendency of the ultrarich to minimize their personal and their corporations’ tax payments—and of government to facilitate such arrangements—is, at least in part, responsible for the starvation of public services. Then, under the current tax arrangement and at their whim, those same ultrarich step in with philanthropic dollars for which only they get a deduction. These public services, then, are removed from the control of the public and “given” as alms with strings attached—i.e., they are turned into private charity projects, of interest to the rich philanthropists but not necessarily the individuals and communities being starved because of the lower tax revenues.
The nonprofit sector, as we have said previously, is not very good at pursuing affirmative legislation, generally playing a defensive game—and in this case, that will just not suffice. There is an urgent need for a decisive, equity-based tax agenda to reverse this antidemocratic tax measure.
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It is not as if no one has been paying attention to the issue. We spoke with the National Council of Nonprofits’ Tim Delaney, who helped us to contextualize the issue. In summary: to protect charitable giving incentives, well more than one hundred associations, groups, and networks of nonprofits and foundations convened through the Charitable Giving Coalition. In 2016, and more intensively throughout 2017, coalition members blanketed Capitol Hill multiple times in multiple ways. Teams of nonprofit staffers, board members, and funders attended count less meetings with senators, representatives, and staff (on the Hill and back in their districts) to deliver (1) key messages about the importance of retaining the charitable deduction; (2) data about the severe consequences of weakening the charitable deduction; and (3) support for expanding the charitable deduction so it would be available universally to all Americans to support their communities through enactment of a nonitemizer deduction.
Such an incentive existed in the early 1980s, and for more than twenty years, United Way led the charge to have it reinstated. These efforts brought in more supporters; however, rein statement did not happen. Then, late last year, Americans watched as Congress moved at record speed in passing comprehensive tax “reform.” The “Tax Cuts and Jobs Act” did not directly change the then one-hundred-year-old tax law that incentivizes giving by allowing individuals to claim a deduction from their taxes for their charitable contributions. However, Congress made an indirect, yet related, change that significantly undercuts that incentive. The new tax law nearly doubled the standard deduction to $12,000 for individuals, $24,000 for couples. That change alone will reduce the number of people who itemize—that is, those who will still claim deductions for their charitable contributions. Congress’s own Joint Committee on Taxation estimated that the change in the standard deduction will reduce the number of taxpayers itemizing their deductions by about 28.5 million, from 46.5 million down to 18 million, a drop of 61 percent of taxpayers to only 12.5 percent. The conservative American Enterprise Institute (AEI) predicted in June that “27.3 million tax filers will switch from itemizing their deductions to claiming the standard deduction in 2018.” Consequently, the tax law, per AEI, “will reduce charitable giving by $17.2 billion (4.0 percent) in 2018 according to a static model and $16.3 billion assuming a modest boost to growth.” AEI estimates that four-fifths of the decline is the result of the change in the standard deduction. So, while technically the federal tax incentive for charitable giving remains untouched, other changes mean that approximately 27 to 28 million fewer taxpayers will be filing for itemized deductions. It will impact who gives and who receives. Those 27.5 million people aren’t tech titans or hedge-fund billionaires giving megagifts to create new foundations or build new colleges at their alma mater in order to have their names live in perpetuity. Rather, the bulk of those 27.5 million people who will no longer be itemizing their deductions live in local neighborhoods and gave in the past to local groups that relied on those local contributions to meet local needs.
Delaney told NPQ, “While the experts on both ends of the political spectrum are projecting huge losses in charitable giving of between $17 billion to $21 billion annually, I don’t think it will be quite that bad this first year, because most Americans won’t realize the full consequences of the new tax law until after they’ve filled out their tax forms a time or two. Whatever the early data show—now and even [over] the next couple of years—the harm will only get worse for the small and midsize nonprofits that serve people in their local communities.”
The universal deduction approach, also called a non-itemizer or above-the-line deduction, has a proven track record in the states for increasing charitable giving for all income levels of taxpayers. Currently, two states—Colorado and Minnesota—provide a giving incentive for taxpayers even when they do not itemize their deductions. Research by the National Council of Nonprofits on the Colorado tax law found that taxpayers in that state donated on average about $2,000 per year to charities. In response to concerns that the federal tax law could depress charitable donations, the legislatures in both Colorado and Minnesota considered bills to enhance the incentive by removing thresholds and limits. Neither bill prevailed this year, but state lawmakers are expected to promote the expanded deduction in 2019.
But, back at the federal level, it is well past time for the nonprofit and philanthropic infrastructures to stand up strongly for the democracy-building purpose of this sector. Let’s adopt a more affirmative agenda and get this done!