Don’t turn Scrooge under new tax code
The tax code will test altruism this giving season, and charities should be worried.
President Donald Trump’s tax cuts slashed rates on businesses and raised the standard deduction for individuals, dramatically reducing the appetite for deductions. With fewer tax benefits to be gained from charitable giving, will companies and individuals still make donations? Or will charities feel a pinch?
Experts are split. Some are advising nonprofits to tighten their belts, while others predict the strong economy will make us more generous.
My bet is that corporate giving will go down. The Tax Cuts and Jobs Act of 2017 reduced the official corporate tax rate from a maximum of 35 percent down to 21 percent.
Companies use deductions and credits to reduce taxes as much as possible. To take a tax deduction, though, a company needs to have a significant tax bill. The new, lower rate reduces the tax burden, and therefore the appetite to make donations.
Charitable giving is also a marketing tool, but only when a management team feels the need to get the company’s name in front of the public. When profits are high, as they have been this year, executives often cut marketing budgets, according to the annual Philanthropy Outlook, produced by Indiana University.
“Corporate giving may or may not increase; strong economic growth may not do enough to offset the decrease in tax incentives, particularly if overall consumer sentiment is weak,” the report concludes based on a scenario that reflects current economic conditions.
Experts will scour annual reports next year to determine how corporate giving reacted to the tax code, but until then, we can only guess.
The Republican tax bill also doubled the standard deduction for individuals and married couples, which means far fewer taxpayers will need to itemize deductions to minimize their taxes. Since taxpayers can only claim a deduction for a charitable gift on an itemized tax return, many Americans will see no tax advantage to making donations this year.
Individual and family giving
could drop by $13.1 billion, and estates of the deceased could reduce donations by $7 billion, according to Patrick Rooney, an economist at Indiana University’s Lilly Family School of Philanthropy. His forecast, in separate research from the Philanthropy Outlook, is based on giving patterns observed after past tax cuts.
Overall giving could drop 4.6 percent compared to 2016 when American gave a record $390 billion, he concluded.
Perhaps making matters worse, research at the University of Chicago shows a direct correlation between charitable giving and the S&P 500 stock index. When stocks go up, so does giving. Unfortunately, the S&P 500 is flat for the year and has spent much of it in negative territory.
Therefore wealthy donors with significant stock holdings have not had a very good year, and they are the most significant private givers.
In addition to passing his tax bill, President Donald Trump is also changing donor behavior. Liberal activist organizations have seen a spike in donations, while both political parties collected record amounts in this year’s election campaigns. Most contributions to these groups are not tax-deductible, but they hint at a shift in donors’ priorities when budgeting their giving.
Nevertheless, religious organizations consistently bring in the most money, tallying $122 billion in 2016, according to Indiana University researchers. Education, human services, foundations and health nonprofits round out the top five.
Nonprofits may also see different results based on their donor profiles. At least 5 percent of high-income families will still need to file itemized returns and claim charitable deductions next year.
“Organizations more reliant on smaller donations from less wealthy donors would have cause for concern, while nonprofits that receive funding from highnet-worth individuals/ households would be better able to weather this change,” the Philanthropy Outlook advises.
I should hope, though, that everyone’s charitable giving will go up despite the change in the tax code. The economy is strong, and tax cuts mean we have more money in our pockets. The recipients of our generosity also need our help more than ever. Rents are more expensive; wages are higher and running a nonprofit is not getting any cheaper.
There is also plenty of need. Whether it is sick children or the arts, our governments are stingy in addressing society’s problems and enriching our culture. If we don’t want the government deciding how to spend our money, we must at least take responsibility and make donations of our own if we want a better world.
The impetus to give, after all, should always come from our hearts, not from our tax accountants.