Tom Saler: Tax proposal has unintended consequences for nonprofits

“These are my principles," the comedian Groucho Marx once proclaimed. “If you don’t like them, I have others.”

The same might be said for lawmakers who’ve built careers out of condemning budget deficits, but who now seem intent on passing a tax bill that, absent cuts to Medicare and Social Security, could add at least $1.4 trillion to the national debt over the next decade. About three-quarters of that amount will accrue to wealthy heirs and for-profit businesses whose earnings relative to GDP already are near an all-time high.

But while the for-profit sector of the U.S. economy is poised to receive a gusher of government largess, the nonprofit community stands to lose a crucial source of funding.

Under a bill passed by the House of Representatives last month, the standard deduction — now used by 80% of taxpayers — would double to about $12,000 for single filers and $24,000 for married couples. If enacted, the number of taxpayers who itemize — and thus are eligible to deduct charitable contributions — is estimated to drop from 20% to 10%.

Even for individuals and families who continue to itemize, cuts in top individual tax rates would effectively increase the after-tax price of charitable contributions. According to the nonpartisan Tax Policy Center, the after-tax cost of a charitable deduction for the top 1% of earners would rise from 67.7% to 94.3%, and for all income levels, from 79.2% to 91.3%.

Individuals account for about 80 cents of every dollar donated to a public charity, compared with 15 cents for foundations and five cents for corporations. On an inflation-adjusted, per-capita basis, charitable giving in America — a category that includes religious, educational, human services and arts organizations — has increased by 250% over the last 60 years.

That amount does not include the economic value of the 8.7 billion volunteer hours that 63 million Americans donate annually. College graduates are more than twice as likely to volunteer than those without a post-secondary education.

In a May report that reflected expectations for a slightly smaller rise in the standard deduction, the Lilly Family School of Philanthropy reported that “the current proposals, which include an increase in the standard deduction and a decrease in the top marginal rate, would have a negative effect on charitable giving” of up to 4.6%, or $13.1 billion per year.

Educational institutions could be particularly hard hit through an excise tax on college and university endowments and by a phase out of the estate tax. The House plan also waters down a popular 1954 law that prohibits charitable organizations from engaging in political activities.

Jobs at stake

There is more on the line than good deeds. Besides promoting a wide array of charitable causes, nonprofit organizations in the U.S. make significant economic contributions as well.

Philanthropic organizations account for 5.4% of the nation’s total output of goods and services, a three-fold increase since the 1950s. Over 11 million people — roughly 10% of the workforce — are employed in the nonprofit sector. Since 2000, nonprofit revenues have roughly doubled, to almost $2 trillion.

I doubt that the authors of the various tax-cut proposals making the rounds in Congress set out to deliberately injure the nonprofit sector. Most of the damage to charitable organizations would be the unfortunate consequence of revising a tax code that for almost all of its history made tax-deductible donations deductible only for wealthy taxpayers.

Over a five year stretch in the early 1980s, however, charitable contributions were considered “above the line,” and thus lowered a filer’s adjusted gross income by the amount of the donation regardless of whether the standard deduction was taken.

“Combined with current tax reform proposals, expanding the charitable deduction to non-itemizers more than offsets the charitable giving lost by other tax reform proposals and increases giving by 0.4% to 1.7%,” the Lilly Family School of Philanthropy study concluded. “Expanding the charitable deduction to non-itemizers, as a stand-alone provision, increases total giving by between 1.3% and 4.3% and has a negligible effect on total revenue…”

If Congress can see fit to provide a windfall to the for-profit sector, it can also see fit to help nonprofits. It’s time to make charitable donations tax deductible for everyone.

Tom Saler is a freelance journalist and the executive director of a Madison-based nonprofit. He can be reached at www.tomsaler.com.