The major losses charities sustained in their lobbying on the new tax law have cast a pall over many nonprofit advocates. But they have the opportunity to win back for donors new tax incentives — and they can succeed if they learn from the mistakes of the past few years.
The reason there’s so much opportunity is that Congress inevitably will be forced to grapple with both the unsustainability of the deficits caused by the new tax law and problematic features of the new legislation.
One of those features is the significant reduction in tax incentives to give.
Although Americans are deeply committed to the charities they support, they and their elected officials often come to view broader advocacy for the nonprofit world with the same skepticism they do self-serving trade associations. That lack of trust is a key reason the charitable deduction has been watered down in a variety of ways over time, including in 2018 to the point that only a little over one-tenth of households — mainly high-income taxpayers — will be eligible to claim the tax benefit.
A deduction that is only available to the most affluent donors cannot pass the laugh test for political sustainability. That means that options to encourage more giving, such as extending the charitable deduction to everyone, might be put back on the bargaining table. That said, nonprofits must realize that at a time when deficits are rising, they will need to do a better job than ever articulating the reasons taxpayers should subsidize contributions. At the same time, they must also demonstrate that they understand that policies affecting charities need to be both cost-effective and proven to work. That means pushing ideas that yield the most charitable giving per dollar of revenue lost and that don’t ask the IRS to enforce what it cannot enforce.
The Uphill Battle
The challenges faced by charities extend far beyond one Republican-led tax bill. Nonprofits receive limited support from both sides of the aisle. Here are some of the many difficulties facing charities that I’ve witnessed in over several decades of involvement in setting and advising on tax and charitable policies.
The tail effect. When large tax bills are shaped, lawmakers focus on revamping the overall tax system or economy, and the charitable deduction is at best on the tail end of concern.
A general rather than targeted attack on itemized deductions. Elected officials often propose a simplistic across-the-board cut on a set of programs rather than examining the design and merit of each program. For instance, Congress recently cut by a fixed percentage the budget of most programs subject to appropriations. President Obama proposed putting a cap on the total amount of itemized deductions an individual could take, regardless of the merit of each, while President Trump suggested and got from Congress a blanket increase in the standard deduction that significantly reduced the number of taxpayers who would itemize any deduction. The challenge for charities: distinguishing themselves from other players, like the real-estate agents lobbying for a mortgage-interest deduction for second homes, when these across-the-board efforts gain momentum.
Justifying a deduction. If two people have the same income but one gives away a lot and the other little, then it’s fair to suggest that the person who gives little can afford to pay more in taxes. But analysts and elected officials alike have increasingly neglected that “equal justice” argument for a deduction, while expressing skepticism as to whether the deduction, when viewed as an incentive, has a very significant impact on giving.
Those complexities might be dealt with if Congress had a more sympathetic ear. But on both sides of the aisle arise other concerns:
The high incomes of some charity workers. We could debate whether in a world of rising inequality charities should pay top-level staff members the same level of salary as corporate America offers. For now, let’s just note that voters and their representatives asked to sacrifice money for a nonprofit’s mission sometimes view well-compensated executives as not similarly committed and perhaps even wasting contributions. Clear proof of the reaction can be found in the tax law’s new excise tax aimed at organizations that pay executives $1 million or more and its new tax on investment income earned by well-endowed private colleges and universities.
A wide range of abuses of tax-exempt status. Over the years, journalists and others have demonstrated that many donors and nonprofits exaggerate the value of gifts simply to take bigger tax deductions. We’ve also seen too many efforts to use charities for self-serving or commercial purposes that have nothing to do with advancing the common good. One may consider it unfair to hold charities to standards that are high and difficult to enforce, but, unlike other interest groups, charities exist to serve the public, not themselves.
Moving forward, new efforts to improve the tax code will face a government budget way out of whack. Even before this tax bill, all the real growth in federal government spending has been scheduled to go for three items: health, Social Security, and the interest costs that rise because we don’t collect enough taxes to pay our bills. Moreover, though economic growth provides significantly more revenue over time, about 150 percent of that revenue growth already was committed to those three items alone. That percentage will only rise as the new tax law reduces revenue further.
Among the many consequences: Most charities will find that the government has dwindling funds to carry out their missions in areas as education, housing, or helping the poor.
Even more problematic, public support for the charitable deduction will likely erode if it continues to be available to just about 1 in 10 taxpayers.
So, charities have an uphill battle ahead of them to justify increasing or even maintaining a charitable tax subsidy.
Turning Adversity to Advantage
That said, as charities face budget cuts and increased demand for their services, it seems easier than ever to make the case that it’s illogical to place such severe limits on deductions for people who give away their income to help others
Giving everyone a tax benefit for donations would be a marvelous way to demonstrate that the U.S. government and the public value people who help others. America has perhaps the highest overall contribution rate in the world for many reasons — foremost our culture — but a widely available charitable deduction can strongly reinforce and champion this exceptional American virtue.
At the same time, nonprofits will need to appeal to more than virtue. They must demonstrate the cost effectiveness of proposals that offer new tax benefits to donors. That means adopting ideas that nonprofits have so far been slow to back: endorsing performance standards, benefit-cost calculations, and policies that work.
One idea nonprofits should push comes from economists, who believe that subsidies are most effective when they prod people to do more than they would normally. One way to do this is to grant tax deductions only for giving in excess of some floor so that the subsidy is concentrated more on sums beyond the amount people at each income bracket typically give. That has another advantage: It limits the sums that the IRS needs to but can’t monitor.
Tax Policy Center research shows that among those who do give, the vast majority give more than 2 percent of income and the average is close to 3 percent. We’re used to hearing that Americans give 2 percent of income on average from sources like “Giving USA,” but that’s because the researchers are averaging in the zero amounts from nondonors.
So if we assume that a lot of donors give well above 1 or 2 percent, a policy that offered deductions for only those gifts above 1 or 2 percent of income would probably be a smart way to encourage donors to stretch and give more than they did in the past. And it might lead those who now don’t give anything to consider doing so.
Nonprofit advocates should buy into other efforts to get maximum contributions out of each dollar of government subsidy. For example, let people deduct right away any gifts they make through April 15 (or earlier if they file taxes ahead of the deadline) rather than sticking to previous year’s December 31 deadline now in place. This proposal has passed the House of Representatives in the past and provides more bang per buck than almost any other charitable incentive I have examined.
It’s also time to create a better system for charities to report to the IRS on gifts received to reduce the cheating that thrives when everybody knows nobody is watching. Yes, this means a bit more work for some charities to report to the IRS what they usually report to individuals, but it would also be cost effective in providing additional revenue that could be used to enhance incentives for real givers.
Of course, these efforts may go nowhere if attempts are not made to improve the image of the nonprofit world. We need a long-term and broad campaign focused on extolling examples of generosity, with less attention on particular charities or formulas for how one gets there.
The losses to charities in the new tax law are significant — a decline of about 30 percent of the tax subsidies for charitable giving that the federal government offered donors in the past.
Yet out of this adversity come some unique opportunities to design cost-effective tax subsidies, reduce cases of abuse, and enhance the reputation of charities both individually and together. The nation is desperately in need of some unifying and bipartisan efforts, and a wholesale drive to strengthen the nation’s charities could provide a great common ground for moving forward.
Eugene Steuerle is co-founder of the Urban-Brookings Tax Policy Center and has worked on tax-overhaul efforts at the Treasury Department.
