As Congressional Republicans and the Obama Administration continue negotiations over the best ways to both reduce the federal deficit and place the U.S. on a long-term path of sustainable growth, positions on raising tax rates and reducing tax deductions for wealthy households shift regularly. Nevertheless, while the evolving debate can be difficult to follow, it is one that nonprofit leaders must not only be aware of, but contribute to—especially as lawmakers move closer to a final deal.
Since 1976, Campbell & Company has worked with thousands of nonprofit organizations to navigate the philanthropic marketplace, including in challenging economic situations. In addition to our on-the-ground experience, we are a founding member of and active participant in the Giving Institute, which produces the annual Giving USA report on philanthropy, and have sponsored a report by the Center on Philanthropy at Indiana University on the impact of proposed tax policy changes on itemized charitable giving.
In this article, we draw on both our experience and our expertise to provide the key information nonprofit leaders need to know to become a part of the discussion over the federal budget. After summarizing competing positions on tax rates and deductions, we explore their implications for philanthropy and suggest key steps you can take to prepare for potential policy changes.
What Could Happen?
In a shift from his earlier position, President Obama recently announced that he does not support any limit on charitable deductions in an attempt to raise revenue. Prior to this position, the President was in favor of capping charitable deductions at 28 percent. Additionally, the Obama Administration proposes to allow the Bush-era tax cuts to expire on incomes greater than $200,000 (250,000 for families), effectively raising top rates from 35 percent to 39.6 percent; according to the Congressional Budget Office, this could increase revenue by more than $820 billion over the next decade.
Congressional Republicans have held that a plan limiting all deductions—including healthcare, mortgage, state and local taxes, and charitable giving—and closing tax loopholes could save $800 billion over the same period. The GOP has cited three policy options from the Committee for a Responsible Federal Budget(CFRB), a bipartisan nonprofit organization:
Limiting deductions to $25,000 for high earners: Under this option, individuals making more than $200,000 and families making more than $250,000 per year could not deduct more than $25,000 each year. A more progressive variant of this proposal would allow individuals making between $200,000 ($250,000 for families) and $400,000 ($500,000 for families) to completely deduct expenses up to $25,000 and partially deduct additional expenses over that limit. Individuals making more than $400,000 (or families making more than $500,000) would not be able to claim any partial deductions.
Limiting after-tax value of high earners’ tax expenditures: A second option would limit the value, after taxes, of all tax expenditures, including deductions, tax exemptions and tax credits. (The CRFB cites examples including “all itemized deductions, the child tax credit and exclusion for employer-provided health insurance.”)
Limiting expenditure values for the 28 percent bracket: The final option in the CRFB paper would limit the value of certain tax expenditures, again including deductions, credits and exemptions, for individuals and families in the 28 percent tax bracket. Individuals and families in higher tax brackets would have progressively lower limits to expenditures, and those with an annual income of $1 million or more unable to receive any value from expenditures.
Most importantly, nonprofit leaders need to remember that donors give, first and foremost, because of their generosity. A variety of economic and social science research has shown that charitable intent—not tax considerations—are the primary drivers of philanthropic support, and regardless of policy changes, the large majority of donors will continue to support the causes closest to them.How could this affect giving?
At the same time, tax policy affects the amount of philanthropy that even the most generous donors are able to contribute. The national average for all deductions exceeds $26,000, and proposed limits may leave some donors unable to deduct all or part of their gifts. According to the 2011 Center on Philanthropy study that Campbell & Company sponsored, capping itemized deductions at 28 percent for top earners would cause a $0.82 billion decline in charitable giving in the first year and a $1.31 billion decline in the second.
In addition, overall tax rates impact charitable giving, particularly since upper-income households provide a disproportionate amount of individual charitable gifts. According to Giving USA, aggregate individual giving closely tracks disposable personal income, which could be affected by increased marginal tax rates. The Center on Philanthropy’s analysis found that allowing the Bush tax cuts to expire for high earners could decrease itemized charitable deductions by $1.69 billion in the second year.
Finally, it is important to keep the overall economic picture in mind. Giving USA has consistently found that aggregate philanthropy hovers around 2 percent of GDP, and regardless of tax policy, a growing economy should increase disposable income and therefore charitable giving. This suggests that policies placing the U.S. on a path of economic growth will be critical to philanthropic giving and the long-term strength of the nonprofit sector.
What can I do?
This is a unique partnership between philanthropy and public policy, and it presents an opportunity for nonprofit organizations to engage in dialogue with their board members, donors, community and Congressional representatives. We’ve provided you with some easy steps to take to add your voice to the evolving conversation:
Communicate with your donors about these issues now, advising them not to panic, reminding them of the reasons they support your organization, and discussing their opportunities to give this year. Top donors should also be encouraged to contact their financial advisers.
Explain to your staff, donors and volunteers the opportunity and importance of participating in the dialogue, both in your community and with your elected representatives.
Contact your U.S. Representatives and U.S. Senators and ask them to support nonprofits and communities by protecting the charitable giving incentive.
Above all else, we urge nonprofits to ask significant donors for gifts before the end of the year and begin longer-term conversations with board members and other leading donors about proposed changes to the tax policy and their effect on their giving. We also urge them to actively participate in the ongoing debate and ensure that it accounts for nonprofit organizations and charitable giving.
www.GiveVoice.org provides a great resource for finding your U.S. Representatives and U.S. Senators
About Campbell & Company
Campbell & Company is a national consulting firm offering advancement planning, fundraising, marketing communications and executive search services to nonprofit organizations in nearly every sector.
Through thirty-six years and more than a thousand engagements, we have helped our clients anticipate and manage the challenges of the philanthropic marketplace. Our offices are located in Chicago, Boston, Portland, Los Angeles, the San Francisco Bay Area and Washington, DC. For more information, please call toll-free (877) 957-0000, email email@example.com or visitwww.campbellcompany.com.