Is it time to eliminate the charitable giving tax deduction?
Let’s face it. Our government is broke. We The People have accumulated almost $20 trillion in debt. As government leaders wrestle with this issue, the non-profit sector continues to rally from time-to-time insisting every other sacred cow in the tax code should be scrutinized except for our own. Putting aside the fairness and hypocrisy questions, I’m left wondering: 1) why do we cling to this entitlement so strongly, 2) what is the real effect of this tax policy on our sector and 3) what would really happen if lost this tax status?
Why do we cling?
In my opinion, I think the non-profit sector is afraid of change. It might be as simple as this.
The reason I come to this conclusion is that I cannot find any compelling research-based evidence that clearly proves that giving taxpayers a deduction for their charitable giving has any significant effect on whether or not your organization receives support.
How I did come to this conclusion? There are many stories in the Wall Street Journal, Nonprofit Quarterly and Stanford Social Innovation Review that speak to this issue. While there are opinions on both sides of this debate, the following facts remain:
- More than half of the deductions being taken for charitable giving comes from a very small percentage of taxpayers (some say this gives taxbreaks to people who don’t really need them)
- Taxpayers who don’t itemize their taxes (a very large number of people) still donate to charities
- Review of the history books demonstrate, despite tax code tweaks and changes, charitable giving has remained constant at around two percent of GDP
- Eliminating this tax deduction amounts to $51 billion more dollars in tax revenue
These are simply facts. (Note: many people come to very different conclusions around these facts)
However, when I set aside the facts and look back over my 20-years of non-profit and fundraising work experience, I can only recall ONE PERSON who was strongly motivated to make a charitable contribution because of the tax code. And for those of you are wondering, “Was that donor and accountant?” the answer is “Of course, he was.”
I don’t want to muddle this point. So, let me be clear. I’ve spoke with many donors (both large and small) who mention the word “tax deduction.” It is usually in reference to needing documentation for their accountant. Only one donor actually pushed the pencil and said he needed to make a donation of a certain size to minimize the amount of tax he would pay to Uncle Sam.
Based on the facts and my experience, here are the opinions I hold:
- Donors who take advantage of the tax deduction do so because it is available to them
- Many donors don’t determine how much they plan on giving to you because of the deductions (of course, there are exceptions and most are probably related to estate planning and in some instances NAP credits in certain states)
- Donors don’t decide if they will donate to you because of the tax deduction (I believe they donate to you because they support your mission and the people closest to your mission)
- No one really knows if charitable giving will go down (or go up) if the tax deduction is eliminated (and anyone who claims to know probably thinks they know who will win the next election or what next year’s crop yields will be)
So, based on facts and opinions, I can only conclude our sector’s resistance to eliminating the charitable giving tax deduction is largely based on the fear of an unknowable future.
What is the real effect of this tax policy?
Again, this is hard to quantify and know for certain, but the following are a few guesses:
- It helps push a large quantity of charitable giving from individuals into the fourth quarter of the calendar year (because fundraising messages focus on “giving before the December 31st deadline”)
- It can muddle case for support messaging (e.g. instead of focusing exclusively on community needs and your organization’s solutions/programs language about taxes and non-mission focused based rationale creeps into the discussion)
- It can hamstring non-profit organizations from engaging in robust lobbying and public policy efforts on behalf of your organization and clients (e.g. IRS rule about public charities only being allowed to engage in a limited amount of legislative lobbying or risk losing their non-profit tax status)
What if the deduction disappeared?
I am not a fortune teller. I cannot predict the impact of such a policy change. However, I can confidently say a few obvious things:
- Eliminating the charitable giving tax deduction would be a “market disruptor” and result in change
- Recent disruptions in other sectors has produced winners and losers
- Market disruptions oftentimes results in innovation
- Non-profit organizations who are unskilled or simply bad at basic fundraising best practices such as developing a compelling case for support will most likely struggle until they adapt, innovate or go out of business
- Non-profit organizations who are donor-centered, relationship-builders, collaborative, innovative and good at fundraising basics (e.g. case for support, prospect identification, cultivation, solicitation, donor stewardship, etc) will likely survive and quite possibly thrive
I suspect many readers have strong opinions on this subject, and you’re invited to share your thoughts and experiences in the comment box below. I’m also curious what, if any, market disruptions you might be able to think of (e.g. if you could hit the reset button for our sector) that would spur change, innovation and growth. Please feel free to weigh-in with those thoughts, too.
Here’s to your health!
Founder & President, The Healthy Non-Profit LLC
Posted on July 28, 2016, in Fundraising, nonprofit, philanthropy, resource development and tagged charitable giving tax deduction, fundraising, nonprofit, philanthropy, resource development, tax policy. Bookmark the permalink. 3 Comments.
As always, an interesting perspective Erik, one that I generally agree with (although I can’t get excited about leaving more cash on the table for a government with a notorious history of bad spending.)
The exception to your theory might be planned giving. Here I find that the tax deductibility of charitable remainder trusts and gift annuities helps in the marketing of these important gifts.
Thanks for weighing-in, Jerry. I agree with you about planned giving, which is why I tried to highlight that as a possible exception in the post along with NAP credits. As for poor spending on the part of our government, I’ll resist touching that hot potato. 😉 Of course, the $20 trillion in debt we need to payoff is money already spent, and there is a need to find revenue to pay that off over time. Just ask the Simpson-Bowles Commission from six years ago. But then again, I digress. I always appreciate your perspective. Thanks for sharing!
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