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Commentary: A Troubling Reliance on Major Donors

A few months ago I wrote a column (“The Impending Decline in Charitable Giving”) noting that both conservative and liberal economists agree that charitable giving will fall by about five percent as a direct result of the Tax Cuts and Jobs Act of 2018. Although we don’t yet have numbers for the fourth quarter of 2018, it’s clear that the charities of America haven’t just thrown in the towel and accepted this as a fait accompli. The latest statistics show that total contributions have actually increased slightly during the first three quarters of 2018.

Before we get into the weeds of what’s happening in the nonprofit world, let’s take a moment to review how we got here. The new tax law enacted by Congress in late 2017 essentially doubled the standard deduction, thereby reducing the number of taxpayers who will itemize their deductions in 2018. In effect, this means that about 21 million taxpayers will not be able to claim any income-tax deduction for gifts they make to charities in 2018.  

Although most of us will still give because taxes are never the sole motivating factor, incentives do matter. A major incentive for charitable giving has been eliminated for 21 million taxpayers, and that will have repercussions. Hence the economists at the conservative think tanks believe giving will decline by about four percent, and their liberal counterparts expect that the drop will be far greater: around six percent. Regardless of their political affiliation, nearly every reputable policymaker and economist believes that giving will go down.

Indeed, through the first half of 2018, things were looking very bad for the charities of the United States. According to the Fundraising Effectiveness Project – a quarterly report that every true fundraising professional scrutinizes – charitable giving by every measure, across every demographic, was down through June 30. Then surprisingly, we were all caught off guard by the top-line number in the Sept. 30 report.

Through the first three quarters of 2018, total charitable giving actually increased by 2.6 percent. When I opened that latest report, I laughed out loud because I loved the idea that both the conservative and liberal experts were wrong. Then I began to parse the numbers, and the smile quickly faded from my face. It’s easy to see what’s driving this increase, and it’s not sustainable. In fact, it’s masking a deeper problem.

Professional fundraisers across the country were confronted with the challenge presented by the new tax law and have responded accordingly. A disproportionately high percentage of major donors will continue to itemize on their tax returns even under the new law, and thus they will still claim a charitable deduction for contributions they make.  Further, it makes sense that charities have decided to give greater attention to their wealthiest friends, for whom the change in the standard deduction will have little to no impact.

In the jargon of the field, fundraising professionals have been shifting their solicitations to maximize the potential of retained donors who already contribute at a major level. Put more simply, charities are pressuring a small group of their wealthiest friends to give more money than ever before.

That’s what the statistics are telling us is going on. The total number of people who give (the overall donor rate) is down 4.3 percent for the year as compared to 2017. The number of people who gave last year and decided to give again this year (the donor-retention rate) is down 5.6 percent. The new-donor rate is down 7.6 percent. These reports are filled with colored charts and graphs. As of Sept. 30, every donor category is a whole lot of red ink except in one area: The total revenue generated from major donors shows a bright-green increase of 3.1 percent. That’s the only category that’s up, and it’s the entire reason that overall total charitable giving is up 2.6 percent during the first nine months of the year.

Unfortunately, this is – at best – a short-term way to address the shortfall.

First, it’s relatively easy for a charity to continue to tap existing major donors as long as the wealth of those donors continues to grow. At the time the September 30 report was issued, the stock market was still in the midst of a nearly 10-year-long bull run. That record growth cannot continue forever, and in some sectors of the stock market, the last quarter of 2018 has already moved into a bear market. As the wealth of major donors begins to level off – if not contract – these donors’ willingness to increase their charitable giving will dramatically diminish. We simply cannot continue to tap the same small group of wealthy people over and over again. It’s not sustainable.

Second, the rates at which charities are adding new donors and retaining old ones are falling. Sadly, our wealthiest and best friends will not live forever. Today’s major donors usually began their relationship with a charity as a mid-level or even modest donor. Put more bluntly, if we don’t engage and retain new donors, we won’t be able to replace the gifts of our best friends when they leave this world.

I’m hardly a statistician, but I suspect that when the Dec. 31 report is released early in 2019, it will show that giving was flat, if not down slightly, for 2018. Yet as I’ve written before, I’m even more worried about 2019. Most regular folks like me aren’t talking tax strategies with their accountant throughout the year because we see these people once a year when we’re preparing our taxes. Moderate-income families are the lifeblood of most charities, and they form the group most likely to discover next April that those charitable gifts they made in 2018 are not deductible on their tax return. That almost certainly will negatively influence the amount they choose to contribute in 2019.

I hope I’m completely wrong. I hope a year from now we’ll be laughing at the gloomy projections of the economists on both the right and left. Yet if a charity is smart, it’s already taking appropriate budgetary steps to prepare for a bumpy ride ahead, just in case the experts are right.

Bret Bicoy is president and CEO of the Door County Community Foundation. Contact him at [email protected]