News and analysis
April 22, 2011

Americans Gave a Lot Less in the Recession Than Experts Predicted

American donors gave a lot less to charity in the first two years of the recession than they did in 2007, dropping their donations a total of about 20 percent from 2008 through the end of 2009, new data from the Internal Revenue Service suggest.

The decline is far sharper than experts had expected—and much more substantial than in previous downturns.

The new numbers from the IRS underscore just how big a financial hole nonprofits must climb out of as the still-fragile economy recovers.

In 2008, the IRS says, Americans wrote off $172.9-billion in charitable contributions, a 10.6-percent drop from 2007. Its estimates for 2009, released this month, project a 14-percent drop, to $148.6-billion.

To be sure, the IRS number for 2009 charitable donations is not yet final because the agency is still tallying how much taxpayers itemized on their returns, and its preliminary figures are often under the actual amount by $8-billion or more. Assuming that happens again, the final tally will still show a decline of more than 9 percent in 2009.

Missing the Steep Drop

One reason it was unclear how badly nonprofits were hurt in the downturn is that “Giving USA,” an annual estimate of philanthropy that many fund raisers use to benchmark their results, told a very different story about how individual donors responded to the recession. So did projections by other scholars of giving.

Giving by individuals dropped by 2.4 percent in 2008, it said, and didn’t decrease at all in 2009.

Looking back, it now appears thatGiving USA’s” methodology for estimating how much individuals gave did not reflect the true effects of the economic downturn, said Leo Arnoult, a Memphis fund-raising consultant who serves on a committee of experts who evaluate “Giving USA” each year.

“Our model did not capture the depths of this recession,” he said. “It was off by a substantially greater percentage than normal.”

Nonprofits and their boards, he said, “make decisions based on 'Giving USA,’ National trends are helpful, but there are limitations to them. The worst thing would be for a nonprofit to jump to the conclusion that their development staff is not doing its job, is not tracking with the growth rate reported by 'Giving USA.’”

Paul G. Schervish, director of Boston College’s Center on Wealth and Philanthropy, who also sits on the committee, agrees that scholars were unable to assess the real impact of the downturn on giving. “Clearly this recession has reduced giving far more than earlier recessions,” he said. “We can no longer believe that individual giving is very resilient, decreasing only minimally, or holding steady in times of crisis as severe as this recession.”

Mr. Schervish and his colleague John Havens have devised their own estimates of charitable giving, projecting that giving fell by a cumulative 10.6 percent from 2008 through 2009, but Mr. Schervish said the actual drop was probably even steeper. “We were off, too,” he said.

Revised Methods

The numbers released from the IRS have added ammunition to critics who have spent the past year questioning the accuracy of “Giving USA,” particularly because other studies have documented double-digit percentage drops in giving prompted by the recession.

For example, donations from individuals to colleges and universities declined by 17.8 percent after inflation in 2009, according to the Council for Aid to Education, while the Association for Healthcare Philanthropy reported an 11-percent decline in giving by individuals to hospitals and medical centers last year.

Researchers at Indiana University Center on Philanthropy who compile “Giving USA” defend the accuracy of their estimates.

The annual change in contributions from individuals, they note, has historically been within 2 percentage points of the change in itemized contributions eventually reported by the IRS for any given year.

But given the severity of the recession, “we made a commitment to re-evaluate our model,” said Patrick Rooney, executive director of the Center on Philanthropy.

Since last year’s “Giving USA” was released, he said, the center has hired an economist to re-examine the econometric model it uses to project giving. As a result, he said, the center is proposing a “relatively minor” change to its methodology.

Nevertheless, he said, the revision will allow the center to better assess how giving is affected by changes in consumer confidence and patterns of consumption, which tend to change a lot in a severe recession. The changes will be reflected in the next “Giving USA,” which will contain revised figures for 2008 and 2009 and is due in June.

Mr. Rooney declined to speculate about what the revisions would be or how closely they will match the IRS drops.

Clear Picture Is Elusive

“Giving USA” always faces a challenge because it publishes its estimates for giving six months after the close of the year, while the IRS takes two to three years to issue its estimates of how much people donated to charity in any given year.

Even the IRS figures are not entirely accurate: Some wealthy people, for example, give away more than they can deduct on their tax returns.  

 What’s more, the tally of giving by individuals must reflect not just how much people wrote off on their taxes, as shown in the IRS numbers—but how much people who don’t itemize give, said Una Osili, the center’s director of research at the Center on Philanthropy.

“We cannot just look at itemizers and get a fair picture,” she said.

Only 36 percent of Americans itemize their returns, so it’s possible that tens of millions of donors are not captured in the IRS figures.

However, people who don’t itemize tend to be poor or middle-income taxpayers. And more than 75 percent of the contributions from individuals come from people who itemize, according to “Giving USA.”

John Havens, Mr. Schervish’s colleague at Boston College, says he doubts that gifts from people of moderate means could do much, if anything, to offset the sharp downward trend in giving revealed in the IRS figures.

Less affluent people “lost the greatest proportion of their wealth in the recession,” he said. “Their home values went down as the housing market collapsed, their debts remained constant, and even the value of their vehicles dropped off by more than vehicles at the high end. They were more likely to become unemployed.”