‘Giving USA’s’ estimates of philanthropy in 2018, the first full year under the new tax law, show that the law did not do what critics feared it might. It did not undermine civil society or debilitate America’s charities when it declined just 1.7 percent after inflation.
But that has not prevented another round of dire warnings from nonprofit leaders. Independent Sector’s chief executive, Dan Cardinali, called ‘Giving USA’s’ results “alarming,” while a United Way Worldwide senior vice president, Steve Taylor, predicted the figures might be just the beginning of a continuing drop in donations.
Since the American economy, usually a good predictor of giving, grew nearly 3 percent in 2018, there is no doubt philanthropy’s anemic performance was disappointing. But the record was a good deal better than most experts on giving expected it to be. What’s more, the last major tax overhaul, in 1986, offers hope that the future may be brighter than nonprofit leaders think.
Fewer Have Access to Deductions
The change in the law that has given nonprofit leaders their greatest concern in the past 18 months was its more progressive provision — a near doubling of the standard deductions to $12,000 for individuals and $24,000 for couples.
The new level provided average Americans with sizable savings in income-tax payments. But more people taking the standard deduction means fewer people itemizing their deductions. In fact, the change seemed likely to cut in half the number of taxpayers who had a financial incentive to itemize their deductions, including the one for charitable contributions.
Advocates for nonprofits on Capitol Hill and elsewhere said they feared this change would mean fewer donors and, thus, less money flowing to nonprofits.
Ahead of the passage of the tax law, the Lilly Family School of Philanthropy undertook research (with which neither of us was involved) looking at a variety of tax measures that were similar, though not identical, to the ones that Congress considered. Its researchers estimated that the measures examined would have lowered individual and family donations (the largest component of annual giving) by an amount between $4.9 billion and $13.1 billion, which amounts to somewhere between 1.7 percent to 4.6 percent of the total.
Experts at the Tax Policy Center, operated by the Brookings Institution and Urban Institute, were even more pessimistic, calculating the potential loss at $12 billion to $20 billion, or 4 percent to 6.5 percent of charitable giving. (The differences in the two sets of calculations reflect differences in the specific tax proposals analyzed and the differing expectations that the researchers took from prior studies of how taxpayers were likely to react to such proposals.)
Endowment Growth Stoked Foundation Giving
Now that ‘Giving USA’ has produced its estimate of how much Americans actually donated in 2018, however, these conclusions look too gloomy.
Individual and family giving did go down, but only a bit more than 1 percent from its 2017 level (or 3.4 percent after taking inflation into account). The 2018 total of $292 billion amounts to the third largest annual figure on record for such giving.
But there’s more to the picture: Partly because of the same 2017 tax bill that increased the standard deduction, endowments grew substantially, leading to large increases in giving from foundations.
And the amount realized from bequests, which was also predicted to decline sharply because of the tax bill’s changes to the estate tax, remained roughly the same; even after adjusting for inflation, it fell by just 2 percent.
Perhaps even more important, the estimates to date will be far from the final word on how the 2017 tax measure affected philanthropy. Later this year, when the Internal Revenue Service releases data from actual 2018 tax returns, ‘Giving USA’s’ projections of individual and family giving will almost certainly have to be adjusted: Its estimates of total 2017 giving, for example, had to be revised upward by $14 billion, a not-insignificant 3 percent.
There is also a structural reason to expect changes: The full effects of the 2017 tax law are not likely to be seen in the 2018 numbers because donors will only gradually change their giving levels and patterns in response to the new deductibility rules or tax rates. For example, the 2018 figures could include gifts that donors have long made annually — but might be curtailed in the future as the donors come to understand that they are getting smaller or even no tax breaks.
Anticipating Changes
Still more confounding to the estimates, taxpayers were likely adjusting their giving even before the Tax Cuts and Jobs Act became law.
In the 1986 Tax Reform Act, Congress not only cut tax rates but also eliminated a deduction for charitable gifts that was previously available even to people who took the standard deduction. Nonprofit leaders expected these changes to reduce donations, and they were right: From 1986 to 1987, individual and family giving fell nearly 4 percent, or 7.2 percent after adjusting for inflation.
But when researchers looked back on what happened, they found that the decline was at least partly due to taxpayers who anticipated the new law by making donations in 1986 that they would otherwise have delayed until the following year so that they could save more in taxes under the more favorable 1986 system. In 1988, total giving resumed its upward march, which lasted until the 2008 recession.
To be sure, since the 2017 tax bill was enacted nearer to the end of the year than the 1986 bill was, taxpayers in 2017 had less time to adjust their giving plans than those in 1986.
But if we see a spike in 2017 itemized charitable deductions when the IRS publishes its tax data later this year, it would suggest that the 2018 decline in individual and family giving was more apparent than real: That is, some donors may have taken advantage of the older system by giving in 2017 what they were planning to donate the following year.
In other words, the example of the aftermath of the 1986 tax overhaul suggests that 2018’s small reduction in giving is not necessarily a harbinger of continuing drops in 2019 and beyond.
Impact of Religion
What really happens to philanthropy in the future will depend on a lot more than tax policy. For instance, the health of the economy and the stock market will matter: The downturn on Wall Street at the end of 2018 may have depressed giving for the year. So will population changes: For example, the increase in people with no religious affiliation would be expected to reduce giving. Conversely, natural events like hurricanes or other kinds of disasters sometimes lead to outpourings of contributions.
How effectively charities make their cases to donors — or avoid trust-deflating scandals — will also count.
‘Giving USA’s’ recent estimate of donations in 2018 should send a chastening message to those who thought they knew how tax changes would affect philanthropy — or who believe they can know how philanthropy would fare if new tax breaks were enacted. Despite several decades of claims to the contrary by nonprofit leaders, changes in tax laws make just a tiny difference compared with other changes in society and the economy.
Leslie Lenkowsky is an Indiana University expert on philanthropy and public affairs and a regular Chronicle contributor. He and Suzanne Garment, a visiting scholar at Indiana University, write frequently on philanthropy and public policy.
