April 15th has come and gone. I hope you filed
your taxes, and of course, I hope that all of us received an above average
refund. (I couldn’t resist making a quip that would bring a smile to
researchers.)
With 2018, we have a very new tax situation in the United
States. The “Tax Cuts and Jobs Act” has produced changes that Time Magazine
called the “largest overhaul of the U.S. tax code since the Ronald Reagan era.”
Among its provisions, it increases the incentive to take the standard
deduction, rather than to itemize deductions, such as donations to charity. Some
nonprofit leaders have expressed concern, and research might make those leaders
wary. The highly respected Lilly School, for example, suggested that a
potential national decline in giving could total as high as $13.1 billion. The
Tax Policy Center asserts that the decline could go even higher, to perhaps $20
billion.
Will the new tax laws help or hurt nonprofit efforts and our
work to benefit communities? The prediction that someone makes will depend on their
assumptions about why people give money to eleemosynary institutions. Do donors
contribute because they can reduce their taxes? Or do donors contribute because
they want to support a mission, to further a cause, or to support something worthwhile
in their community?
You might ask yourself: Why do you donate? If the amount of
taxes you pay will change as a result of a change in tax laws, will you adjust the
amount you donate to charity?
The argument that the latest tax act will reduce
contributions to nonprofit organizations builds on the premise that the
opportunity to deduct charitable contributions on a tax return constitutes a
significant, if not primary, motivation to donate financially to charitable
organizations. By implication, the less effect that donating money has on
reducing taxes, the less that people will give financially to charity.
About 40 years ago, my father told me that he believed that the
above premise makes little sense. As Dad pointed out, if someone has a major obsession
about holding on to their wealth, that person should not donate at all. If
someone donates $100 to charity and saves $30 on taxes, they have still parted
with $70. Better to just pay the tax and retain the $70.
Evidence suggests that some donors factor tax deductions into
their final decisions about charitable gifts. The loss of the opportunity to
take a tax deduction might result, in 2018, in fewer or smaller charitable
donations. However, when push comes to shove, will most donors give more weight
to the mission they want to support, or to the tax benefit they no longer
receive for donating?
Further informing this topic, aggregate data show that
nationally about 74% of taxpayers do not itemize their deductions on their tax
returns. These people already receive no direct tax benefit from making a
charitable donation. Beginning in 2018, the standard deduction increases to
$24,000. This will reduce the number of people who itemize their deductions,
thus reducing the number of people for whom a charitable contribution results
in a lessening of taxes. Nationally, the Tax Policy Center expects the percent
of non-itemizers to rise by 15 percentage points from 74% to 89%.
If those 15% of taxpayers have tax savings on their mind,
and have no strong allegiance to charity, then donations to charity might decrease.
However, if other factors influence their decision to donate to charitable
organizations, then the new tax laws will have weak or no effects.
History can inform us as well. Many nonprofits feared that
the 1986 tax act would lead to a major decline in donations to charity. That
major decline did not occur.
Something else to keep in mind: A dollar “given” to Uncle
Sam does not serve a completely different purpose from a dollar given to
charity. The National Priorities Project at the Institute for Policy Studies
(which has a “progressive” bent) shows that, of the money we taxpayers paid in
2017, close to 30% went toward health; 7% went to unemployment and labor; 4%
went to education. (Of course, 24% went to the military which, albeit necessary
to maintain, certainly does not exist as part of the charitable, nonprofit
sector.)
Federal spending has significant effects on our communities’
well-being – think jobs and nutrition, for example. The more that we can inspire
and align the work of government and the work of nonprofits, the better.
So, what’s my prediction? Probably that most people will
continue to give as they have in the past. Maybe that’s my optimistic side and
my faith in humanity. Tracking the effects of the tax act becomes complex because
some evidence suggests that a slight decline in charitable giving might have
begun during the 21st century, well before the new tax act.
Additionally, changes in the economy, positive or negative, will influence
giving trends. So, perhaps we will never definitively know the effects of
“TCJA” upon charitable giving.
In any case, I’m fulfilled by carrying out my legal
obligations as a taxpayer, just as I am fulfilled by carrying out my moral
obligations as a donor. One way or another, we need to fulfill our duty to care
for each other.
