Nonprofits Could Take $13.1 Billion Loss Under New Tax Plans

Nonprofit organizations that rely on charitable donations could take a big hit if tax reforms being discussed by the White House and Republicans in the House of Representatives come to pass.

A study of the Trump-backed tax reform plan by Independent Sector and the Indiana University Lilly Family School of Philanthropy found that two key components—an increase in the standard deduction and a lower top marginal tax rate—could cause annual charitable giving to decrease by between $9.8 billion and $13.1 billion. That decrease would likely hit religious institutions the hardest, according to the report released last week.

But youth and family services leaders fear it will greatly impact their sector as well.

“The impact of $13 billion annually in reduced funding for children and youth serving non-profits would have an enormous impact on the social service sector, which relies so heavily on charitable giving. We see every day the impact that social services has in the community,” Susan Dreyfus, chair of Leadership 18 and president and CEO of the Alliance for Strong Families and Communities, wrote in an email. The Alliance for Strong Children and Families is a national network of over 450 nonprofit human-services organizations.

The  Tax Policy and Charitable Giving Results study looked at the Tax Reform Act of 2014 by House Ways and Means Committee Chairman Dave Camp, which it treated as a stand-in for the developing House Tax Reform Blueprint and the proposed tax reform plan laid out by the Trump Administration on April 26, 2017.

Researchers focused on two provisions of Camp’s plan that are similar to the White House and House Blueprint tax policy proposals: increasing the value of the standard deduction to $11,000 for individuals and $22,000 for married couples and decreasing the highest marginal tax rate to 35 percent. They also included the impact of extending the charitable tax deduction to non-itemizers, an issue that they say could offset the negative impact the tax changes in the Camp plan would have on charitable giving.

In looking at how charitable contributions and government tax revenue might be affected by the tax plans, the study found that charitable donations would decreasing between $4.9 and $13.1 billion. The study also found that expanding the charitable deduction to non-itemizers on its own would boost total giving by between 1.3 percent and 4.3 percent and would not impact total tax revenue.

Ultimately, accounting for several different variables, all outcomes of increasing the standard deduction and/or decreasing the marginal tax rate resulted in less government tax income and lower charitable giving across income levels, to varying degrees. For example, combining an increase in the standard deduction and a decrease in the top marginal tax rate (which most closely resembles tax policy proposals currently under consideration, according to researchers) charitable giving could be decreased by anywhere from $9.8 billion to $13.1 billion. It also found that this decrease in giving would hit religious institutions harder than others.

Charitable donations are a substantial source of support for many nonprofits, foundations and philanthropic organizations. More than $373 billion was raised through donations in 2015 in the United States. Across the country, 59 percent of the population made some donation to a charitable cause, including many organizations that serve children and youth.

A drop in charitable giving would hit the Alliance’s partner organizations and children they serve particularly hard, Dreyfus said.

“The estimate varies broadly across member organizations with some relying on charitable giving for as much as 40 percent of their operating revenue,” she said. “Generally speaking, our members rely on charitable giving at any level of their revenue because any amount helps them to achieve their mission.”

Researchers propose that “extending the charitable deduction to non-itemizers may be one way to recoup some of the potential losses in charitable donations caused by the various proposals under consideration.”

Applying various tax-price elasticities to the scenarios, researchers found that extending the charitable deduction to non-itemizers would increase giving by between $3.8 billion and $12.2 billion dollars.

They ultimately concluded that “the positive of effects of extending the charitable deduction to non-itemizers more than offsets the negative effects of the other two policy changes on giving,” if that charitable deduction extension is included alongside a decrease in the top marginal tax rate and an increase of the standard deduction.

Read the full study here.

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