If the federal tax overhaul had not been signed into law in December, charities could have expected to see a 4 percent increase in giving this year and a 4.2 percent jump in 2019, according to an annual forecast released Tuesday. But the new rules eliminated key incentives for taxpayers who itemize to make charitable gifts, which means all bets are off. For the first time, the “Philanthropy Outlook,” a report by Indiana University’s Lilly Family School of Philanthropy and the fundraising consulting company Marts & Lundy, declined to emphasize a numerical prediction about growth in giving for the next two years. Instead, the report spotlights three possible economic scenarios — of high growth, uneven growth, and a flat economy — and the possible impact of each on various sources of giving.
“The goal of this year’s report was to provide more context,” says Una Osili, director of research at the Lilly Family School.
“The tax law came so late in the year, we’d have had to redo all the predictions,” says Phil Hills, chief executive of Marts & Lundy. “But even then, there are so many uncertainties. Rather than take another half a year, we decided to go with what we have.”
Even amid the uncertainty, the researchers expressed concern that charities supported by middle-income donors had the most at stake and needed to take steps to explain the new tax law or risk a downturn in donations. (See this Chronicle study, which examines how some middle-income donors have already stepped up from giving.)
Many Moving Parts
If the new tax rules were not in effect, the researchers projected:
- Giving by individuals and households would climb 3.6 percent this year and 3.7 percent next.
- Foundation grants would increase 6.1 percent in 2018 and 6.3 percent in 2019.
- Corporate support would jump 2.8 percent this year and 3.7 percent the following year.
- Estate gifts would rise 4.4 percent in 2018 and 5 percent in 2019.
The tax overhaul included many changes that affect donors: It cut income-tax rates for many Americans, doubled the value of estates that can escape taxation, and doubled the standard deduction.
Estimates by the Lilly Family School say the tax overhaul’s increase to the standard deduction alone, to $12,000 for single people and $24,000 for married couples, could reduce overall giving by $4 billion, to $11 billion annually.
On the other hand, some experts say that as Americans see more money in their pockets due to the tax cuts, they could be more generous with their favorite causes than they have been in the past.
The researchers’ approach to the latest philanthropy forecast also reflects widespread uncertainty over what impact the tax cuts will have not only on giving but on the economy more broadly. Volatility in the markets this month has muddied the waters further. Another factor still in play: efforts by some states to find workarounds to the limits on deductibility of local and state taxes, some of which involve the charitable deduction.
3 Giving Scenarios
Three factors, the researchers say, are likely to indicate whether giving will thrive this year: the gross domestic product, the performance of the Standard & Poor’s 500 Index, and consumer spending. Here’s how the three economic scenarios sketched by the Lilly Family School and Marts & Lundy would play out:
High growth: Corporate and foundation giving, which are predicated on the previous year’s gains, would likely be robust. Individual giving, though dampened somewhat by the loss of tax incentives, would be buoyed by strong consumer spending and philanthropy.
Uneven growth: If the tax overhaul and other economic conditions this year are slow to benefit working-class Americans, organizations that rely on small donors would have “cause for concern,” the report says, while charities that receive substantial support from wealthy donors would “weather the change.”
Foundation giving in this scenario would be very strong due to market and gross domestic product performance, but corporate giving might not accelerate if economic growth doesn’t offset the decrease in tax incentives.
Flat growth: Confusion, loopholes, and unintended consequences from the tax overhaul could dampen giving by households, the report says, which tend to be risk-averse. They could delay making big gifts until they more clearly understand the tax implications. Implications for other types of giving are unclear.
The report shows that the past decade has seen the smallest average rate of growth in giving since the decade from 1979 to 1988: Both decades saw average increases of 2.4 percent. That earlier one included both a recession and a major tax cut.
During the Reagan era, “there was a drop in giving, but was it due to recession or the tax cut?” Hills asks. Hence the choose-your-own-adventure style of this year’s report, in the wake of the new federal tax rules. “There’s really nothing much to model this much of a change in policy,” he says.
Tips for Uncertain Times
So what’s a fundraiser to do in 2018 and beyond?
A potential trouble spot, the researchers suggest, involves a lack of information for midrange donors. Households that give, say, $5,000 to $20,000 a year, might need guidance from the charities they support, Hills says.
“That middle-class donor group is going to be the most confused,” he says.
Such households often support smaller, local charities that lack the resources to reach out sufficiently to educate donors.
“If you think about most middle-class donors, say they are giving to their local food bank or their alma mater. The alma mater is likely to have a bigger staff and can explain the tax changes.”
Osili agrees that donors can benefit from education about what the new tax rules mean: “Remind them that their donations are still tax deductible, and it’s up to them to itemize or not.”
Hills and Osili recommend that charities keep talking to donors about their mission and how they’re accomplishing it. “That’s always the one thing to go to,” Hills says. “And to always be talking to your biggest donors, all the time.”
Communicating with donors, Osili says, “sounds like work you would do anyway. But it’s very important in this very noisy media environment.”
Also keep in mind: Donors don’t support your cause just because they get a tax savings. They give because they want to change the world.
“Making a gift is essentially an irrational purchase,” Hills says. " People will still do that as long as they feel their gift is being used well.”
Correction: A previous version of this article had incorrect numbers for the standard deduction.
