States Spark Endowment Gifts With Special Tax Incentives

In Iowa, assets at the state’s community foundations are growing like stalks of corn in summer.

Charitable endowments at the state’s community foundations totaled $781 million in value last year. That’s at least a sevenfold increase since a law was passed in 2003 that gives tax credits to Iowa residents who make gifts to endowments, says Kari McCann Boutell, president of the Iowa Council of Foundations.

To be sure, other factors besides the tax credits have played a big role in that growth. A robust stock market has helped. And the number of community foundations established in Iowa over that period has exploded to 130, in part to distribute revenue from the states’ 19 casinos.

Still, the tax credits are the “key driver” in boosting endowments’ growth, Boutell says, because they’ve given community foundations a strong hook to promote endowed gifts to donors.

Idea Catching On

Iowa is not alone in providing such tax breaks. Since the late 1990s, four states have passed laws designed to spur gifts to endowments: Kentucky, Maryland, Montana, and North Dakota.

And the idea continues to spread. Measures that offer similar benefits were introduced this year in Colorado, Michigan, Minnesota, and Mississippi — and in past years in Ohio and Wisconsin.

Though getting such legislation passed is difficult at a time when most states are tightening their belts — Michigan’s bill is still in play, but the three other state bills failed — nonprofits say they have advocated for the measures because they would keep giving local.

As baby boomers and their elders die, $9 trillion will flow from their estates over the next decade, according to the Center for Rural Entrepreneurship. But when heirs leave their hometowns, their family wealth leaves, too — hence the need for an inducement to keep some money local.

Such charitable-giving incentives at the state level are more important than ever, nonprofits say, because of last year’s tax overhaul. A key change — the doubling of the standard deduction — means fewer people are expected to itemize and have access to the charitable deduction. That will have the biggest effect on middle-class and upper-middle-class donors — and backers of state credits like the idea that in many cases smaller donors like those can benefit from the tax break.

While all nonprofits want to find ways to stimulate giving, not everyone likes the endowment-credit push. In Minnesota, a key charity coalition worried that the law might divert gifts from charities seeking funds to spend more quickly.

Programs Differ

Not all endowment credits take the same approach.

One of the key differences: Iowa, Kentucky, and Maryland allow the benefits to be applied solely to endowed gifts to community foundations, while Montana and North Dakota include endowed donations to colleges and other charitable organizations, too. Montana allows the tax credits to be applied only for certain types of planned gifts, like charitable remainder trusts and gift annuities, while direct cash gifts and contributions of stock and other appreciated assets qualify in other states.

Here’s what each state offers taxpayers:

Benefits of Incentives

Though charities acknowledge that it’s hard to tie growth in endowments to the tax measures specifically, data strongly suggests that the credits spur giving.

In Kentucky, for instance, endowment donations to community foundations by donors claiming tax credits jumped 53 percent in fiscal 2017 — to $5.1 million — compared with the previous year.

That boost corresponds with lawmakers’ move to double the statewide cap on the tax credits to $1 million starting in 2017, says Brian Dineen, senior vice president for finance and administration at the Blue Grass Community Foundation, in Lexington, Ky.

The change prompted community foundations to advertise the benefits of endowments to a larger number of people, Dineen says, and shows just how influential such tax changes can be. “It’s hard for anyone to argue it hasn’t been successful,” he says.

The Montana Community Foundation says various forms of planned gifts have soared, like gift annuities and charitable-remainder trusts that provide tax credits if they’re established with a nonprofit endowment. In 2007, the foundation received $566,744 in gift annuities; in 2017, that figure jumped to $2.2 million.

Taking away tax credits seems to have a negative impact on endowment giving. Michigan lawmakers in 2011 eliminated a tax credit up to $100 for individuals and $200 for couples if they made gifts to endowments at community foundations. The next year, gifts of the size covered by the credit dropped by 27 percent, according to a study by the Dorothy A. Johnson Center for Philanthropy at Grand Valley State University. Though it’s difficult to say definitively whether the change in the law caused the decline, it was " clearly associated,” the study says.

The tax-credit programs are not especially costly, even where there’s no cap on amounts that can be claimed statewide.

Montana and North Dakota have no annual limit on tax-credit claims, but the revenue lost because of the programs is less than 1 percent of each state’s general fund budgets, according to both states’ revenue agencies.

A Dispute in Minnesota

Minnesota was considering a tax credit aimed at community-foundation endowments in its most recent legislative session, but it failed in part because of opposition from a nonprofit association.

The bill would have created a 25-percent tax credit for residents who make contributions to community-foundation endowments, with an annual $4 million limit statewide.

The Minnesota Council of Nonprofits objected, arguing that the plan created a special tax advantage for community foundations, leaving out other charities, says Jon Pratt, executive director of the Minnesota Council of Nonprofits. Pratt worried that the law might distort giving in favor of endowed gifts at the expense of contributions that could be spent right away.

Minnesota community foundations strongly disagreed with that position, says Bob Tracy, director of public policy at the Minnesota Council on Foundations.

The bill was written to include only gifts to community foundations because expanding it to other nonprofits might have made the proposal unfeasibly expensive, Tracy says.

Nonprofits should focus on finding ways to channel as much wealth as possible to local endowments that can benefit all charities, Tracy argues. Because community foundations have expertise in managing endowments, they should be given priority, he says.

Spurring Collaboration

In other states, foundation leaders say they’ve tried to avoid such conflicts.

In North Dakota, community foundations, nonprofits, and the foundation head at Bismarck State College worked together to advocate for the passage of tax-credit legislation in 2007, says Kevin Dvorak, president of the North Dakota Community Foundation.

In Michigan, there’s been little opposition to a bill introduced this year that would restore the same tax credits for endowment gifts to community foundations that were pulled back in 2011, says Rob Collier, president of the Council of Michigan Foundations. The bill still sits in a key legislative committee, but no action is expected until the fall, he says.

Michigan nonprofits have experience with such tax incentives, he notes; the state started offering donors a break for giving to endowments starting in 1989. While the law was in effect, hundreds of charities established endowments at community foundations because many of them didn’t have the ability to manage such funds, says Collier.

The tax credits drove growth to those funds, he says: “We view it as a win-win.”

States With Tax Credits for Endowment Gifts

SOURCE: State-government and community-foundation websites and the Community Foundation Research and Training Institute