The Obama administration is threatening to cut the nonprofit tax deduction. Can it be serious? In the current economy, government services continue to be cut, and charities are the only folks filling the gap. Estimates vary, but the consensus seems to be that if the charitable-giving tax deduction is cut, individual giving could fall by between 9 percent and 15 percent, which would eliminate many programs, especially those run by smaller charities.
With the New Year upon us, it appears we’re headed over the “fiscal cliff.” After House Speaker John A. Boehner is re-elected on Jan. 3, however, budget accord likely will be reached in the next couple weeks that will void the cliff’s automatic tax hikes. Nevertheless, until a final deal is inked, the nonprofit tax exemption will still be on the chopping block.
The numbers tell the story of the potential impact. Charitable donations in the United States hit $298.4 billion in 2011, according to the well-respected Giving USA study. Keeping with historical norms, individual donors represented 73 percent of the total at $217.8 billion. Corporations represent just 5 percent of that total, at $14.6 billion. Interestingly, religious organizations in 2011 accounted for $95.9 billion, or 32 percent, of all giving. This is in line with faith-based organizations’ longtime strength in charitable fundraising. It is obvious that a reduction of individual giving by any meaningful percentage would eliminate billions of dollars’ worth of services. A 15 percent reduction would mean nearly $45 billion in charitable service reductions, which is a big number anytime.
The administration’s threat worried small donors at year’s end, typically the time when many people give $10 to $1,000 to charities before the tax year concludes. As a result, some nonprofits that get a little funding bump at year’s end will look in their accounts and see nothing. The timing is doubly bad because it accelerates an already downward trend in nonprofit giving that has been made worse in recent years because of the economic downturn. For example, in 2011, individual giving as a percentage of disposable personal income was 1.9 percent, which was down from 2.4 percent in 2005.
In fact, elimination of the tax deduction for charitable donations would sound the death knell for many local, small-donor-funded charities such as food banks, senior centers and community youth sports programs, and severely crimp the budgets of larger organizations such as the American Red Cross, United Way and Lutheran Services. In light of an impending income tax increase, whacking the deduction would push many household budgets to the brink. One of the first things to go will be that charity check. Surely, the president’s threat is part of his fiscal-cliff negotiations with Congress. What is the Obama administration’s motive behind this untenable threat?
The federal government wields two big sticks in the world of nonprofit funding. First, direct investment of federal funds is the source of more than 12 percent of all American charity. Second, the tax deductibility of individual and corporate donations is another de facto government subsidy for charities. The threatened reduction of at least one of the two government subsidies is credible. The move has thrown a phalanx of charity lobbyists into action. Millions of dollars that would have been spent on nonprofit services are being spent to fight the political battle.
Here’s the secret behind the administration’s threat: The president is using pressure on nonprofit and religious leaders to force their highly influential support for income tax increases on high earners, which are being blocked by anti-tax legislators. Public support for top-bracket income tax hikes from nonprofit leaders in health, faith-based, arts, environment and social services, the administration reasons, will help pry open the deadlock and avoid the fiscal cliff’s automatic tax hikes.
The truth is, any viable budget deal between Congress and the president will likely involve new tax income. Many on Wall Street have even priced an income tax hike into their investment decisions and financial bets for 2013, so negative financial-market reaction to an income tax rise probably would be minimal. Yet the Obama administration’s deadly serious willingness to play the life-and-death game of chicken with charities is a reminder that America’s nonprofits as we know them are heavily dependent on tax exception, and without it, many charity beneficiaries get hurt.
Jay Whitehead is the CEO of Tickets-for-Charity (Tickets-for-Charity.com).
By Douglas Holtz-Eakin
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