The Alliance for Strong Families and Communities, a national organization that represents hundreds of child welfare and juvenile justice service providers, is concerned that the tax reform plan moving through both chambers of Congress is setting up a perfect storm of funding troubles for nonprofits in the sector.
The tax plan could set off a “confluence of factors we see as a major threat to delivery of services,” said Marlo Nash, senior vice president of public policy. “It’s really important to recognize the impact of this to our economy, which is why we can’t have a wrecking ball taken to it.”
The potential impact begins with charitable deductions. The bills in both chambers would nearly double the standard deduction from $6,350 to $12,000, which would greatly decrease the number of people for whom it makes sense to itemize deductions. That is the segment of the taxpaying public that uses the charitable deduction.
Currently, about 30 percent of taxpayers itemize; this would likely fall to about five percent under the new rules, according to the Independent Sector. According to a recent study by Indiana University’s Lilly Family School of Philanthropy, this could potentially mean a $13 billion annual shortfall in charitable giving.
That’s a small percentage of the approximately $373 billion donated to nonprofits each year. But that is of little comfort if donors to your organization decide to cut back without the deduction sweetener.
In the grand scheme of things, charitable donations are a very tiny slice of the funding pie for most providers serving at-risk youth and families. The broader sector of “health and human services nonprofits” accounts for about 8 percent of charitable donations.
But for many providers, their pipeline of individual donors represents the only flexibility in their cash flow. If an organization needs to upgrade its infrastructure, or renovate or build a facility, “government doesn’t usually pay for that,” Nash said.
Private donations also help fill the gaps created by underfunded government contracts, which Nash calls a “chronic issue.”
“For the most part, nonprofit health and human service providers are funded by government contracts,” Nash said. “But the part received in charitable contributions is critical to complementing government funding, and to continuously improving quality, innovation, research, evaluation, advocacy, which are all key functions of the sector.”
The Alliance, and several other national organizations including the United Way, are pushing for a “Universal Charitable Giving” amendment that protects charitable donations from the impact of the standard deduction change. This entails an above-the-line charitable deduction for up to one-third of a person’s standard deduction.
“Congressional offices on both sides are feeling confident they’ve protected this because they preserved the deduction,” Nash said. “But the dots aren’t connecting that by doubling the standard deduction, taxpayers will be taxed on 95 percent of all charitable donations.”
A “universal” amendment has been proffered on the Senate side via an amendment by Sens. Ron Wyden (D-Ore.) and Debbie Stabenow (D-Mich.). The House has a bill from Rep. Mark Walker (R-N.C.) in the hopper.
But the consequences of charitable deductions are dwarfed by the future consequences of the tax plan, Nash said. And this begins with how Congress addresses the fact that this will pile at least another trillion onto the national deficit.
In mid-October, the Senate set itself up for tax reform with the passage of a 2018 budget resolution. That plan maintains 2017 funding levels for this year, and then initiates a $106 billion cut to non-defense spending by 2027.
“They are looking to make dramatic cuts to entitlement programs, and discretionary-funded programs,” Nash said. “We understand that most everything will be on the table except for defense.”
There is really only one segment of non-defense federal spending where savings of that magnitude could be realized, and it is health and human services. This accounts for about 28 percent of all federal spending.
This puts a slew of federal block grants and entitlements that support state and local programs for children and families, including:
- Title IV-E and IV-B, the central entitlement for foster care and adoption services, and a block grant for family preservation (about $9 billion)
- Child Care and Development Block Grant ($2.9 billion)
- Social Services Block Grant ($1.5 billion)
- Head Start ($9.2 billion)
- New funds to fight the opioid epidemic ($500 million last year)
But the budget resolution makes it clear where Senate Republicans would most like to find the money: Medicare and Medicaid. The resolution proposes a $1 trillion cut to the baseline of Medicaid and a $473 billion cut to Medicare, both of which could only be accomplished through pretty significant reform of the entitlement program.
Medicaid is, through direct eligibility and through managed care contracts, a significant source of funding for low-income youth and all youth in foster care. Many of the reforms to Medicaid that were proposed in this year’s plans to replacing the Affordable Care Act would have put that relationship in jeopardy by removing the guarantee of the Early and Periodic Screening, Diagnostic, and Treatment (EPSDT) benefit.
The merger of fewer donations, reduced federal spending and weakened Medicaid guarantees present a “very serious concern that the nonprofit health and human services sector will be challenged to withstand these changes and still meet needs,” Nash said.
A big reason for this is that while the economy has recovered since the Great Recession, the health and human services sector has not and remains fragile. A 2015 study by the Nonprofit Finance Fund found that only 41 percent of human services organizations were able to meet the demand for services, and over half of nonprofits had three months or less in cash reserves.
According to research by Nonprofit Quarterly, about 150,000 health and human services nonprofits were started between 2004 and 2014. Of those, 100,000 have folded.