Charitable Reduction?

Charitable Reduction?

How this year’s election could affect nonprofits—and their funders.

It’s not easy to find out whether a given candidate advocates policies favorable to the nonprofit sector, and the sector’s public policy concerns are not a regular part of debates, candidate statements, or media inquiries. While party platforms for November had not been released when this column went to press in early September, there is ample evidence that in the near term, government actions will have a big impact on the nonprofit sector.

Here are a few issues that nonprofits are following closely. If you donate to nonprofit organizations, you should be following them closely, too.


Charitable Deductions

A fixture of tax policy for nearly a century, the charitable deduction makes it possible for taxpayers to spend pretax dollars on charitable contributions if they itemize. A number of proposals have now been put forward for changes to the deduction, focused mainly on capping deductibility, changing it to a tax credit instead of a tax deduction, and other scenarios that principally target high-income taxpayers.

The Obama administration has proposed limits to the deduction for the 2013 budget year, following a Congressional Budget Office report that analyzed 11 options from both a tax revenue and a donor-incentive perspective. While some look at the more than $200 billion that Americans give to charity and see efficient and effective local service delivery and citizen engagement, others see that number as a tax advantage that benefits the wealthy to a greater extent than the middle and working class. The current administration has referred to the charitable deduction as a “tax cost,” not as a “giving incentive,” putting it squarely at odds with civic, cultural, and religious leaders in the nonprofit sector.

The websites of national nonprofit service organizations have information about the value of the charitable deduction and the best arguments to preserve it. For example, Independent Sector, a Washington, D.C.–based organization that advocates for nonprofits, predicts that without the charitable deduction, annual giving would drop by 25 to 36 percent, and the cap proposed by the Obama administration would leave charities with as much as $7 billion less in annual contributions. The Congressional Budget Office estimates a lower impact on giving, but nonetheless a reduction under most scenarios.

No one knows for certain the extent to which donors are motivated by the tax advantages of their gifts. When charitable gifts are the result of professional estate and tax planning by high net worth individuals and their advisors, the tax benefit of these contributions has been carefully considered and maximized. This is the scenario for many of the largest charitable gifts. Charities are against any changes in the deductibility of gifts, both because of the incentive the deduction provides and because of the belief that individual, voluntary giving for social and civic improvement is as great or greater a public good as wealth redistribution via taxation.

Government Spending

Most nonprofits benefit from one or more forms of revenue from government sources, whether from grants or contracts. Pressure on government budgets means spending in all areas is under scrutiny. Undoubtedly, government spending reductions will affect the nonprofit sector and send organizations hustling for new revenue sources.

Minnesota’s nonprofits would be deeply affected by new rounds of government spending cuts, and many are actively engaging constituents to inform them of spending proposals. Minnesota Public Radio, TPT, and regional public media organizations benefit from many millions of dollars in operating grants from the Corporation for Public Broadcasting. Housing, health care, economic development, and human services organizations all interact extensively with local, state, and federal government, receiving grants as well as contracts for service that foster their work and support them organizationally.

Total government spending dwarfs the foundation and corporate grants that nonprofits receive. As a result, seemingly small cutbacks at the federal level can have much larger consequen-ces at the local level. Private foundations say they cannot make up for government funding cuts; in many instances, their guidelines discourage using their grants for this purpose.

IRA Rollover and Estate Taxes

Charities are speaking up to extend and expand the IRA rollover provisions that Congress established in 2006 and expired in 2011. The provisions allowed taxpayers over age 70½ to roll over up to $100,000 from their IRAs directly to charities without withdrawing the money first, accounting for it as income and paying tax on it. The provision has led to significant increases in money transferred from IRAs to charities. For example, the Arlington, Virginia–based Council on Foundations reports a 25.5 percent increase in contributions to donor-advised funds using this provision in 2010, compared with 2009.

The national conversation about the estate tax also has implications for charities. As the tax rate and gift limits have fluctuated, it is more difficult for both donors and charities to plan. The concept of an estate plan implies something long-lasting and carefully thought-out, but in recent times, advisors have been busy keeping up with the best strategies for their clients.

How will all of this add up for charities? “Charitable giving will not go away, because people are intrinsically motivated to leave a legacy,” says Chris Farrell, chief economics correspondent at American Public Media in St. Paul. “But what happens will affect where people give, how much, and within what structures. Policy will encourage or discourage giving.

“As public policy bounces around, it is much more difficult to plan, both for nonprofits and for donors,” Farrell adds. “And more donors will sit on the sidelines until it’s clearer what’s going to happen with policy.”

Charities may believe they’ve already experienced the worst of the economic downturn. But a look at policymakers’ agendas shows that the boat may have just begun to rock. Nonprofit leaders will need to be nimble, creative, and persistent to lead their organizations through change. And there’s nothing to indicate that the pace of change will be any slower or less turbulent in the years ahead.

Sarah Lutman is a St. Paul–based independent consultant and writer for clients in the cultural, media, and philanthropic sectors.

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