Opinion: Tax Reform and the Nonprofit Board
May 24, 2018 Steve Taylor
Nonprofit boards often want charities to stay on top of donor trends and the ever-evolving landscape of private charitable giving. After all, the ability to raise private donations is crucial to the survival of many charities. Yet, we’ve heard reports of some nonprofit board members assuring concerned staff “not to worry” about the recently enacted federal tax reform law’s impact on individual donations. When a board member discourages a response to a change in the environment, many charity leaders feel as if their hands are tied.
Over the past year, United Way and many other national charities and nonprofit associations have been raising the alarm that due to changes in tax laws (namely the doubling of the standard deduction), upwards of 21 million taxpayers will no longer claim the charitable tax deduction. The empirical evidence we’ve seen indicates that this could decrease giving by 5 percent or more. So what is the disconnect between the national sector-wide perspective and local board members?
As we have worked to explore the perspectives of board members, it’s clear that personal experience, peer discussions about giving, and intuition are driving much of their thinking around the impact of tax reform. If board members are in the approximately 10 percent of taxpayers who will still itemize taxes, they may actually give more as a result of some increased incentives in the tax reform law. Similarly, board members hear from their peers that they will not reduce their donations. Or they hear what sounds like a common sense argument: “if most people are getting a tax cut, that will translate to more donations because people will have more money in their pockets” – in fact, there is no economic analysis that supports this assertion.
This apparent conflict between personal experience and economic predictions can be reconciled. Board members and committed stakeholders may not reduce giving but large numbers of other donors, especially middle-class donors, may reduce their giving.
We know that tax policy is not the main reason people give. When it is a factor, it’s usually only a small part of the decision. That fact contributes to the confusion. But because the charitable deduction has been in existence for more than 100 years, it has been studied by academics, economists, and think tanks at length. There is complete consensus among this group of experts that — at the population level analysis of donors to charities – tax incentives increase giving and removal or limitation of tax incentives reduces giving (see here, e.g.). What economic studies of this nature cannot do is predict how any individual donor will react to a change in tax policy. Thus, it can be true that board members and other key donors will not reduce their donations, but donations will go down overall.
The loss of the deduction for 21 million taxpayers will undoubtedly lead to reduced donations. There has been no study conducted that has concluded that charitable giving will increase as a result of our new tax laws. The population of donors who are most impacted by the charitable deduction change are middle class and upper-middle-class donors. That means charities that rely on middle-class donations will be disproportionately negatively impacted (see “Giving Patterns” table, p. 6).
Given the weight of the empirical evidence, charity leaders cannot afford to take a wait-and-see approach. United Way Worldwide has been advising its network to take proactive action and we hope other charities will do the same. We are recommending two immediate actions.
First, support a change in tax law to make the charitable deduction “above the line,” or “universal” for everyone. Congressman Mark Walker (R-N.C.) and Sen. James Lankford (R-Okla.) have introduced identical House and Senate bills that would amend the new tax law to allow taxpayers who do not itemize their taxes to claim a deduction for donations to charities. These bills have caps on how much can be deducted but would significantly improve the current state of tax incentives. The Walker bill already has nearly 20 co-sponsors. Similarly, Congressmen Chris Smith (R-N.J.) and Henry Cuellar (D-Texas) recently introduced a bill that would establish a non-itemizer deduction with no caps. United Way has endorsed the bipartisan bills and we encourage everyone else to do the same.
Second, we are advising United Ways to adapt their donor engagement and fundraising strategies, looking for opportunities presented by the new law. Resource development staff should consider and engage donors in conversations around changes in the tax law. To the extent companies have unexpected resources, we should ask for additional contributions. That strategy applies to small businesses and wealthy individuals as well. United Way’s forthcoming digital donor engagement platform, Salesforce Philanthropy Cloud, will help engage donors who may be losing tax incentives, but can be persuaded to give more when shown the value of our work.
Just like any other change to the landscape in which charities do their work, organizations should get ahead of the changes and adapt. And board members should be partners in the change by encouraging, facilitating, and even participating in the necessary actions to make every organization stronger and fulfill our missions to improve people’s lives.