Things are about to get difficult in the charitable world. As a direct result of the Tax Cuts and Jobs Act of 2018, charitable giving is expected to decrease by about five percent.
The new tax law enacted by Congress last fall effectively doubles the standard deduction, thereby dramatically reducing the number of taxpayers that will be able to itemize their deductions. It’s projected that 21 million families will no longer be able to claim an income tax deduction for any gifts they make to charity.
Now I’m not here to judge the worthiness of the new tax law. An argument can be made that increasing the standard deduction has benefits that outweigh the costs, but I’ll save that debate for another column. Whether you believe the change to the tax code was good or bad for America, it is now the law of the land. Those of us who care about the people served by the charities of our community need to prepare for the impact of that law.
Regardless of your political persuasion, everyone agrees that incentives matter. Because far fewer Americans will be able to itemize their deductions, the new tax law effectively increased the cost of a charitable gift by 8 percent, according to the Urban-Brookings Tax Policy Center. As a result, the Center issued a report that concluded charitable giving will plummet by as much as $20 billion, or more than 6 percent, in 2018.
Of course, many of my conservative friends argue that the Tax Policy Center is filled with liberal “bleeding hearts” that will use any argument they can to oppose tax cuts. So let’s turn instead to a study conducted by a “heartless” conservative think tank that my liberal friends loathe.
The American Enterprise Institute’s stated mission is to foster “limited government, private enterprise, individual liberty and responsibility,” among other ideas. Alan Viard, a Resident Scholar at the Institute who studies federal tax and budget policy, issued a report earlier this year which concluded, “Charitable giving will face headwinds from the new tax law in 2018. Under the new law, millions of taxpayers will no longer deduct their charitable contributions on their income tax returns, eroding a tax incentive that has long spurred individual giving.”
The conclusion of the conservative American Enterprise Institute is that charitable giving will fall by $17 billion, or about 4 percent.
Hence, the debate is not whether charitable giving will fall as a result of the new tax law. Both liberals and conservatives agree that it will. The only question is by how much. So let’s just split the difference and assume that giving will decline by about 5 percent in 2018. Unfortunately, the early returns are in and they don’t even look that good. Giving is down, and down dramatically by certain measures.
The Fundraising Effectiveness Project has been collecting hard data from the Association of Fundraising Professionals for more than a decade. Each quarter they issue a report measuring trends in the world of charity. In the first quarter of 2018, the total number of donors was down 6.3 percent as compared to the first quarter of 2017. New donors are down by 12 percent.
A critical measure for charities is the new retained donor rate. Like a business that depends on its ability to find new customers, the long-term health of a charity is linked to its ability to both attract and retain new benefactors. The new retained donor rate measures how many first-time donors from the previous year continue to give in the following year. In the first quarter of 2018, the new retained donor rate fell off a cliff, dropping by a whopping 18 percent.
And it doesn’t end there. The repeat retained donor rate is down. The recaptured donor rate is down. The overall year-to-date donor retention rate is down. Only true charitable giving nerds like me actually try to understand what all this stuff means, but it doesn’t take an expert to know that virtually every significant measure being “down” does not bode well for charities and the people they serve.
It also appears that the decline of giving is not spread equally across all nonprofit sectors. Nicholas Duquette, an economist at the University of Southern California, concludes that health care and human service organizations are experiencing the worst of the decline. He also speculates that arts organizations are not being hit as hard. Tragically, it appears that organizations serving the most vulnerable among us are bearing the brunt of this decreasing level of contributions.
While I have nothing more than experience and instinct to back it up, I believe that much of the decrease won’t arrive until 2019. Charitable giving in 2018 continues to be propped up by a disproportionately high rate of contributions from the wealthiest families. The stock market is in the middle of a record bull run. The incredible growth in investment portfolios makes it very attractive to donate highly appreciated stock right now.
The party on Wall Street must eventually come to an end and the market will correct itself. As with bear markets of the past, giving will almost certainly decline as the stock market falls.
Yet the biggest reason I believe 2019 will be even tougher is because the vast majority of Americans likely have no idea that the check they just wrote to their favorite charity won’t be deductible on their tax return. Most regular folks don’t pay a lot of attention to their taxes until spring. They’re not getting tax planning advice on an ongoing basis as wealthier families often do. Many people will receive a rude awakening when they file their taxes in the spring of 2019 and discover that their 2018 charitable gifts are not deductible. When regular people confront that reality, it almost certainly will reduce the amount they choose to contribute in 2019.
Regardless of the timing, both conservative and liberal tax policy experts have arrived at the same conclusion. Giving is declining as a direct result of the new tax law. The charities in our community – and ultimately the people they serve – should get ready because they are in for a bumpy ride ahead.
Bret Bicoy is president and CEO of the Door County Community Foundation. Contact him at [email protected]