The New Tax Law Will Devastate Nonprofit Fundraising

(Photo Credit: Gage Skidmore, Creative Commons)

When Republicans passed the Tax Cuts and Jobs Act of 2017, GOP legislators were euphoric. House Speaker Paul Ryan called the bill “one of the most important pieces of legislation that Congress has passed in decades,” adding that it will result in “profound change” and will set the country on “the right path.”

Not everyone shares Ryan’s optimism. One major criticism that emerged from both ends of the political spectrum involves the amount of national debt it will generate—$1.7 trillion by the CBO’s estimate. Others point out that the bill will only benefit middle- and lower-income U.S. taxpayers in the short-term, while the real windfall goes to the wealthiest 1 percent, who will enjoy as much as 83 percent of the gains produced by the cuts.

Pundits and media outlets have neglected one significant area of concern regarding the tax bill’s impact: a dramatic decrease in revenue for nonprofits.

The legislation altered several key parts of the U.S. tax code that will significantly diminish the likelihood that millions of Americans will donate to charity. In 2019, the standard deduction will effectively double, which will decrease the number of Americans itemizing deductions in their tax  filings from approximately 37 million to 16 million. With fewer middle-income taxpayers itemizing deductions, nonprofits are going to take an enormous hit.

The nation’s wealthiest will also limit their charitable giving thanks to changes to the estate tax. The amount exempted from estate taxes will more than double, redirecting large volumes of money away from nonprofits.

The ramifications of these tax code changes could be industry-shattering. According to the Lilly Family School of Philanthropy, donations could drop by $13.2 billion. A study conducted by the  The Tax Policy Centre predicts that the decrease in charitable giving could range from $12 to $20 billion (for perspective, the worse case scenario predicted by this study amounts to 5.13 percent of the overall amount raised by charitable organizations in 2016).

Development professionals are justifiably panicking over the dismal fundraising forecast. In an interview with the Philadelphia Inquirer, Maureen Murphy—the head fundraiser for VNA Philadelphia—remarked that the “changes make me lie awake at night.”

If the fundraising actuals for the next few years are as bad as the projections, the nonprofit sector may face a financial climate that is even worse than the 2008 recession. According to one estimate by Georgetown University, as many as 220,000 nonprofit workers could lose their jobs. Both the decline in programmatic resources and the spike in staff shortages will hurt the countless constituents that rely on the vital services provided by the nation’s charitable organizations.

Nonprofit professionals need to vocalize opposition to these changes to encourage a policy alternative that will salvage more of the industry’s desperately needed revenue. The tax bill’s architects heard objections relating to these horrible impacts before the legislation passed and did nothing to address them. This is unacceptable, and the industry most organize around this troublesome neglect and promote its own political voice during this perilous period for nonprofits.

Donor-Advised Contributions Increase Dramatically

Nothing motivates major donors faster that potential tax law changes. According to the National Philanthropic Trust, there has been a 72 percent hike in donor-advised contributions. Favorable market conditions and concern over changes to tax laws may be responsible for this dramatic shift.

Donor-advised funds are most likely to be held by high-net worth and ultra-high-net worth individuals. Fears of giving caps influenced major donors in 2016. What will happen in 2017? What type of tax policies will the new administration devise? Questions with answers waiting to be revealed.

It should be noted that the surge in donor-advised contributions did not translate to increased contributions from those funds to nonprofit organizations in 2016. Nonprofits actually saw a decrease in gifts from donor-advised funds. Organizations should find solace in the fact the money is there but the check has not been mailed. As tax-policies become law, 2017 will be an experimental year for giving practices.

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