The Donation Drain: Tax Reform is Sapping Charitable Giving, Leaders Say

Charitable giving by individuals declined sharply in 2018, and advocates in the human service sector fear the reason behind it suggests a permanent downward adjustment in donor giving.

Giving by individuals totaled $292 billion in 2018, a 3.4 percent decline when adjusted for inflation, according to the annual report by Giving USA. That is the biggest decline since the financial crisis in the late 2000s – but unlike the post-recession downturn, this decline occurs against the backdrop of a growing economy that has likely helped boost giving from foundations (up 4.7 percent) and corporations (2.9 percent).

The vast majority of funding to human service organizations flows from government contracts and grants. But donor funding is often the only flexible pot of money that organizations can use for critical activities such as advocacy work, innovation or transition planning.

Leadership 18, a collective of providers and membership organizations in the human services sector, said the decline amongst donors is evidence of an alarm it sounded last year regarding the implications of the Tax Cuts and Jobs Act, signed into law in 2017 by President Trump. The tax law doubled the standard deduction from $6,350 to $12,000, which makes it twice as difficult to achieve a tax advantage by itemizing deductions.

Steve Taylor, senior vice president of United Way Worldwide: “Every member of Congress and staffer that work on tax committees are aware that tax policy influences behavior.” Photo courtesy of United Way.

Itemizing on tax returns is only fiscally advantageous if the cumulative deductions you are able to make exceed what the standard deduction is. Before the changes in the tax law, people in the income strata where itemized deductions made sense made up about a third of the national donor base, said Steve Taylor, senior vice president of United Way Worldwide.

“While giving is largely driven by altruism, there is a consensus among experts that tax policy impacts charitable giving,” Leadership 18 said in a statement following the release of the Giving USA report. “The recent changes to the tax law is virtually the only change in the giving environment that explains the drop in donations in 2018.”

Taylor said the negative effect on donations was all but inevitable.

“The irony of this debate is that every member of Congress and staffer that work on tax committees are aware that tax policy influences behavior,” he said. “Their entire argument was, ‘don’t worry about charitable giving, this won’t impact behavior.’ Which is borderline absurd.”

Research released this winter by United Way showed that while individual donations had been flat as a percentage of gross domestic product, the number of actual donors had plummeted. The percentage of Americans who donated to charity dropped from 68.5 percent to 55.5 percent between 2002 and 2014, according to the report.

The concern over the itemized deduction isn’t as much about losing donors entirely as it is about the size of donations. The American Red Cross’ donor survey found that the percentage of their donors who had itemized the deduction fell from 70 percent to 43 percent this year.

“It’s the biggest threat we’ve faced in long time,” said Suzy DeFrancis, Red Cross’ chief public affairs officer. “For low and middle-income donors, without the tax deductions, they might not have the resources to give as much as they have in the past.”

A 2017 study by the Independent Sector and the Indiana University Lilly Family School of Philanthropy estimated that doubling the standard deduction could suck between $9.8 billion and $13 billion out of individual donations, with religious institutions taking the biggest hit.

Susan Dreyfus, chair of Leadership 18 and president and CEO of the Alliance for Strong Families and Communities, told The Chronicle of Social Change at the time:

“The impact of $13 billion annually in reduced funding for children and youth-serving nonprofits would have an enormous impact on the social service sector, which relies so heavily on charitable giving. We see every day the impact that social services has in the community.”

Leadership 18 has been backing legislation that would institute a “universal deduction” for charitable giving. It would make donations deductible from a person’s reported gross income at tax time – so if he or she made $45,000 and donated $2,000, they’d pay federal income taxes on $43,000.

A deduction bill was introduced last year by Rep. Danny Davis (D-Ill.), and a similar one has been put forth this year by Reps. Chris Smith (R-N.J.) and Henry Cuellar (D-Texas). On the Senate side, Taylor said Leadership 18 is hopeful that Sen. James Lankford (R-Okla.) will reintroduce his universal deduction bill from a year ago.

Neither of the House bills has moved to a committee markup yet.

“The thing about advancing legislation in Congress is, it’s a long … incremental process,” Taylor said. “It’s a lot of slow movement until you reach a critical mass point, then suddenly it gets tacked on to something and moved.”

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John Kelly
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John Kelly is editor-in-chief of The Chronicle of Social Change.