New Tax Laws - Implications for Nonprofits?

April 15^th 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 21^st 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.