March 02, 2009
Charitable-Giving Plan Divides Nonprofit Groups and Worries Donors
By Holly Hall
As President Obama seeks to reduce the value of the charitable deduction for wealthy Americans, fund raisers and other nonprofit experts are divided over whether his idea would cause any substantial change in charitable giving.
The proposal, which hasn’t even been formally sent to Congress, has already caused some concern among wealthy donors, and could well prompt fund raisers to urge wealthy people to give now so they don’t lose the value of their tax breaks by giving after Mr. Obama’s plan takes effect.
Mr. Obama proposed last week to limit the charitable deduction to help pay for reshaping the nation’s health-care system.
His proposal would affect families that have more than $250,000 in income, beginning in 2011. Instead of saving 33 or 35 cents for each dollar donated, as they do now, those taxpayers would save 28 cents under the Obama plan. Mr. Obama’s overall budget proposal would also increase the taxes owed by the wealthiest taxpayers from 33 or 35 percent up to 36 and 39.6 percent of their income in 2011.
In effect, the proposed budget would increase the cost of giving to charity for wealthy donors by reducing the amount of money they can deduct from their taxes.
Independent Sector, the Partnership for Philanthropic Planning (formerly known as the National Committee on Planned Giving), and other nonprofit groups say that limiting the charitable deduction would put a damper on contributions, especially given the bad economy. Even though administration officials have sought to reassure charities that the economy will be better by 2011 when the provision would take effect, some charity leaders think financial conditions could still be rocky.
“My best guess is that this wouldn’t have a huge effect, but because of the economy it is going to have a worse effect,” said Eileen R. Heisman, president of the National Philanthropic Trust, in Philadelphia.
“It certainly is not going to make things better,” she said. “The question is how much worse it will be on top of worse. With the economy this bad, it does worry me that a new policy would be in place, giving wealthy people a disincentive to give.”
That is already the case for some wealthier donors, even though the plan is far from becoming law. Mike Bacile, owner of a Dallas company that provides equipment to restaurants and hotels, said he and his wife have recently set up meetings with officials at two charities to inform them that they will no longer be able to support their causes. Mr. Bacile said he and his wife typically give more than $10,000 to nonprofit groups annually—but they are now scaling back their contributions to about $5,000 annually.
“The upcoming tax hit has forced us to decide what must go,” Mr. Bacile said. “We will still be giving about $5,000 a year to charities that are very important to us for sentimental reasons, But the remaining $5,000 to $6,000 will be going to Obama’s plan. I am not a fan of government deciding what charities deserve my money.”
Plan Won’t ‘Kill Giving’
But some experts believe concerns about the economic impact of lowering the charitable deduction are exaggerated, and the actual effects of the provision on giving by the wealthy would be relatively modest.
“Every time people want to fool around with the tax code, [charities] say it will be the end of philanthropy,” said Bruce Flessner, a Minneapolis fund-raising consultant. “I don’t think it will kill giving.”
Using 2006 tax data, the most recent available, Indiana University’s Center on Philanthropy has estimated that giving by high-income households would have been 4.8 percent less if President Obama’s proposed limits on charitable deductions, and increases in taxes owed by the wealthiest Americans were in effect then.
Given this analysis, “we feel this budget proposal would not have much effect on whether people give but rather how much they give at the margins,” said Patrick Rooney, the center’s director of research.
However, the center said that changes in personal income and wealth, including the condition of the stock market, affect giving more than tax proposals. It noted that every time the stock market declines by 100 points, giving declines by $1.85-billion. Charitable donations rise by that same amount when the stock market increases.
Economy Makes a Difference
Some donors, in fact, say their giving will be affected more by the economy than by any change in the charitable deduction. Barbara Clarke of Winchester, Mass., said she and her husband are not at all concerned about Mr. Obama’s proposal. But she added that they have changed the the manner in which they give because of the recent decline in the stock market.
“The crash in the value of my portfolio takes a huge asset off the table and out of the equation,” Ms. Clarke said. “This actually made me realize that the way I was managing my philanthropy was totally different from the way I managed the rest of my spending. I would never consider relying on stock for any purchases that I need to make in the next five to seven years, so why was I doing it for philanthropy? That was a big eye opener.”
The White House argues that the new economic-stimulus package will help increase giving by boosting the economy and raising incomes. (See an article explaining the White House’s view.)
But others say the proposed limit on the charitable deduction would cause a big drop in giving. “Many charity officials do not understand how tax laws impact giving by the very wealthy,” said Emil Kallina, a Baltimore lawyer who advises affluent donors, including several billionaires, on their charitable plans. “For the vast majority of my clients, every tax dollar they save is an additional dollar for charity. Under the president’s budget proposal, that could amount to hundreds of thousands of dollars on a multimillion-dollar gift.”
Mr. Kallina said that, while President Obama’s budget faces an uphill battle in Congress, he is worried that the provision lowering the charitable deduction could pass, given the president’s popularity and his party’s majority on Capitol Hill. “It is the honeymoon, and Democrats control the House, the Senate, and the presidency,” he said. “The Republicans are not going to fall on their sword for charity.”
Charities should organize and speak out more about their opposition to limiting the charitable deduction, Mr. Kallina said. “Charities are not united,” he said. “There has been a lack of voices unifying the charitable world.”
Future Tax Breaks
Some fund raisers are less worried about the precise impact of Mr. Obama’s plan and more concerned about the precedent that could be set by reducing the value of the charitable deduction to wealthy donors
“You start worrying about where the slippery slope will end,” said Mr. Flessner “You have a philosophical issue about whether the government should play a bigger role and the private sector should be in a smaller role. There is a question of whether this is a direction in which we want to move.”
The Obama White House says limiting the charitable deduction would make the tax code more fair
Currently, in exchange for gifts, donors are allowed to reduce their taxes by the same percentage as their tax bracket; therefore, wealthier donors who pay a larger percentage of their income in taxes get a bigger write off.
That argument, however, has not gained much traction with experts like Mr. Kallina, the adviser to wealthy donors. Under the Obama budget, he says, “it is absolutely clear that charity is paying for the cost of health care, is that a good policy decision?” Health-care reform should not be done at the expense of giving, he said.
“Bluntly, this proposal allows the government to choose the charitable recipient rather than the donor,” Mr. Kallina said. “The government is cutting back on our ability to give to charity, because they want to dictate where the charitable dollars go.”
Robert F. Sharpe, a Memphis planned-giving consultant, said there is an argument to be made against cutting the charitable deduction because it flies in the face of a longstanding principle that people should not be taxed on money they give voluntarily for charitable purposes.
The budget proposal, if passed, would essentially be a tariff on giving by the most-generous donors, Mr. Sharpe said. “If we need this money for social purposes,” he said, “why not tax wealthy people who do not give to charity?”
Short-Term Surge in Giving
By reducing the charitable deduction, Mr. Obama’s plan could create a short-term surge in giving, as wealthy donors rush to make gifts and take advantage of the higher current deduction levels, said Richard Steinberg, an economist at the Indiana University Center on Philanthropy who has studied elevated giving levels in 1986, the year before the tax code was changed to reduce the value of the charitable deduction.
Donations by individuals grew by 14.8 percent in 1986, to $127-billion, and then dropped to $118-billion in 1987, the year the tax change took effect, according to Giving USA, the annual tally of philanthropy.
“The obvious message is that fund raisers could use this to get more donations this year and next year, Mr. Steinberg said.
Neil Kawashima, a lawyer in Chicago who advises wealthy donors, said people who are considering types of giving that offer one-time, upfront charitable deductions on their federal taxes may especially be tempted to consider acting before the deduction rate falls.
Those would include donor-advised funds, which allow people to make contributions to special accounts, claim a deduction, and then recommend how to distribute the money to charity; and “grantor charitable lead annuity trusts,” which allow donors to set up a trust to give annual payments to charities, claim a tax deduction, and then pay taxes on the income produced by the trust.
However, Mr. Kawashima said, fund raisers may have a hard time enticing donors to give more, thanks to the bad economy. “Most people are feeling tapped out already,” he said.
Suzanne Perry and Peter Panepento contributed to this article.
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This proposal might cause “tax-based” giving to decline somewhat. It just means that those who are looking for a quid pro quo won’t find as much of one. But they are so much interested in “charitable giving” or “philanthropy” as they are in themselves. Those for whom a cause matters won’t mind. Those who mind, really don’t matter.
— Philanthro Joe Mar 2, 02:55 PM #
I don’t doubt that IU and Robert Sharpe make valid points about the impact of President Obama’s tax proposals on the nonprofit sector. Just as his tax policy will impact the top 5% earners among all tax-payers, the impact of the deduction value will likely impact the top 10% (or so) of all nonprofits…the biggest, wealthiest among us. I believe it is reasonable to expect a certain amount of pain while we work to correct decades of bad policy. The era of trickle down is over.
— Steve Smith Mar 2, 03:18 PM #
Mr. Kallina, the adviser to wealthy donors, says “Under the Obama budget, it is absolutely clear that charity is paying for the cost of health care. Is that a good policy decision?”
Plain and simple, yes. As a non-profit manager who is an American citizen and taxpayer first, I can say without doubt that fixing our broken healthcare system must be a pressing national priority.
And the vast majority of Americans agree with that—-they expressed that belief last November and continue to express it through their continued strong support for our President and his policies.
Stop whining and figure out how to survive in this recession without relying on tax breaks as your sole means of support, please.
— Larry Kaplan Mar 2, 03:18 PM #
It would cost our country so much less to provide even more incentives for people and companies to give generously. But the Obama Administration doesn’t get it.
Let’s do more to encourage charitable giving, so that schools can provide better training for entrepreneurship and jobs for the future, and more charities can make up the difference in disparities in healthcare, and so on.
We are now tobogganing down this slippery slope toward socialism.
— Kevin D. Feldman Mar 2, 04:04 PM #
How about those of us whose non-profits ARE in the healthcare sector?
As a rehabilitation hospital, 2/3 of our patients are Medicare or Medicaid recipients. We operate with about a 2% operating margin—not because we aren’t good at what we do, but because the government will only reimburse us for certain therapies. Any capital improvements or technology upgrades must be paid for with philanthropy.
By limiting the charitable deductions of some of our most loyal and generous donors AND by retooling Medicare and Medicaid (when rehabilitation is already under-reimbursed)specialty hospitals like ours will become non-existent and getting folks back to their fullest life possible will be virtually impossible.
It has nothing to do with a recession—it has everything to do with government regulation. Being a non-profit healthcare organization will become the ultimate Catch-22.
How can we let folks know that this will happen?
— Suzanne Sughroue Mar 2, 04:30 PM #
It’s amazing that anyone would suggest this tax increase would “not matter” if someone had “charitable intent” – If that is true, why not just eliminate the tax deduction completely?
Obviously, it will have an impact. It will cost donors more to give the same net amount. That money doesn’t grow on trees. Donors try to be good stewards of their resources, and they are wise to consider tax implications.
Most observers can foresee a big shift toward increased reliance on government programs and reduced aid from private nonprofit organizations. Some people will be quite happy with that outcome, but no matter how one looks at it, it means less freedom for individual citizens and more power in the hands of government agencies.
— Jeff Swan Mar 2, 04:57 PM #
— Larry Kaplan
you are a lamb, just keep following your shepard and see were it takes you. “THE SLAUGHTER HOUSE”
— someone Mar 2, 05:28 PM #
“The budget proposal, if passed, would essentially be a tariff on giving by the most-generous donors, Mr. Sharpe said. ‘If we need this money for social purposes,’ he said, ‘why not tax wealthy people who do not give to charity?’”
Like Joe “it’s patriotic to pay more taxes” Biden? (http://www.usatoday.com/news/politics/election2008/2008-09-12-biden-financial_N.htm)
— Kevin O Mar 2, 06:30 PM #
Someone is either Rush Limbaugh or Michael Steele.
— Larry Kaplan Mar 2, 06:41 PM #
Without the rancor, the fear, and the ideological splits, it seems that a slight reduction in the tax benefits of charitable giving by the wealthiest among us should not be taken as a disaster of herculean proportions. Nonprofits have long benefited from government funding; in many cases, this represents 60% or more of operational funds. Private giving has not increased proportionate to increased wealth despite the boom in the stock market, generous tax cuts for the wealthy (in the past decade) and unprecedented increase in net assets of the top 1%. Nonprofits are often expected to “fill in the gaps” left by policies that ignore the inability of ordinary, working people to earn enough money to afford healthcare and housing. We have now hit a wall with cheap money, dubious evaluation of assets, and manipulation by the financial markets. Perhaps it is time for individuals to invest in social policies and nonprofits for the long term, to accept the necessity of doing more with less, more thoughtfully and with greater commitment. This prescription has long been offered to the nonprofit community.
— Susan Daily CFRE Mar 3, 09:55 AM #
I’m all for keeping it simple. Philanthropy should NOT be taxed and our sector should stand firm on this principle. If we must have more tax revenues for health care (or anything else), then propose raising the tax rate(s) accordingly.
— Robert Mar 3, 01:39 PM #
Barack thinks that by penalizing the rich for giving to charity he can redistribute more of their money through taxation?
I was concerned he was in way over his head, but hasn’t the president ever heard of John Galt in “Atlas Shrugged”?
Poor Barack lives in Bizarro World where down is up and up is down. I weep for our nation.
— Rutledge Mar 3, 03:56 PM #
As an Australian fundraiser I am concerned about the message this move would send to our government. Many people in our country supported Mr Obama and I for one am disappointed in both his protectionist approach (denying free trade) and this proposal which has a direct impact on philanthropy.
Australia tends to follow US trends. Please, lead well.
— Kathy Davis GradCertBus (Philanthropy & Nonprofit Studies) CFRE Mar 4, 06:25 AM #
Thank you for covering this issue and the good article Holly, et al!
— Jeff Amundson Mar 4, 01:15 PM #
As the CEO of a small voluntary health organization, with more than three decades of management experience, I can tell you Mr. Obama’s plan will cause great harm to the general public, while diminishing the effectiveness of charities in this sector.
— Bill Bro Mar 4, 01:24 PM #
Point blank, people tend to give to charities more out of a sense of altruism (or likely a sense of paternalism) than they do with the potential tax break. I look at this tax deduction (a modest 7%) as a temporary fix to the much bigger problem of our crumbling economy. Make no mistake, nobody wants to bear the burden of our current state. However, nonprofits and more importantly, the communities they serve have been struggling for way too long and if Pres. Obama’s plan seeks to “even things out”, then so be it.
— Palmtree Mar 4, 01:53 PM #
I’m with Palmtree. I don’t ever remember giving money to a charity so I could get the tax break. I do it to support causes I believe in. I don’t make $250k a year, not even close. But we still manage to give at least $5k+ a year across all our charities, including church. My guess is that churches will be hurt the most by this as many of the smaller ones depend entirely on charitable contributions.
— Bernard Farrell Mar 4, 03:47 PM #
Why is it that we discredit what the wealthy reveal to us through their giving motivations and trends and think that a president and his cabinet (who have shown disinterest in charitable giving) should have the privilege of changing the course of this great nation? We are a nation that has historically sought for the betterment of all mankind from an altruistic perspective rather than serving personal gratification through imprinting philosophies that directly contradict those upon which our nation is based. Let us adhere to our professional standards as representatives of worthy organizations that seek to make a difference in the lives our fellow citizens. This cause will result in a stronger United States – one where those who are given the tools to personal fulfillment turn around and offer them to others.
— Principled Phundraiser Mar 5, 12:24 PM #
I continue to be amazed at all the people calling themselves fundraisers who say, to some degree of heightened alarm, that giving will fall if tax policy changes.
To all of you who are complaining about this, that, or the other thing, try reading history first.
When President Kennedy changed the top tax bracket from 90% to 70% everyone said giving will go down. It went up.
When President Reagan changed the top bracket from 70% to 28% the entire philanthropic world was scared to death. GIVING WILL GO DOWN screamed the headlines. It went up.
And every time since then, whenever someone changed the top bracket, at its worst giving remained flat.
So, for all of you who simply must moan and graon, find another issue. Because people do NOT give for tax reasons. They give because they want to. 32 years in fundraising has taught me that. Bob Sharpe is in the PLANNED GIVING business. Those gifts are dependant on taxes as a part of their selling point. But the b ottom line reason people give has nothing to do with tax deductions.
If you still insist there will be a problem, then, as a professional fundraiser, you may want to consider a different line of work.
— Sam Prince Mar 5, 03:11 PM #
Let’s cut to the simple truth. This proposed change is meant to increase tax revenue. Period. There is a finite limit to the funds that we all have to live our lives, including our charitable giving and taxes. We have to accept that more tax revenue for the government means that as a whole we will all have to reduce our spending. Period. While many different people may choose many different ways to reduce their spending, it seems certain that in a broad sense charitable giving will be reduced along with all our other areas of spending.
I would also like to point out some twisted logic used in previous comments. When Reagan reduced the top rate, he reduced the top rate we had to pay. That meant less taxes and more money in our hands to spend as we saw fit. It seems pretty obvious as I already explained that more money in our hands means generally more to charities (and everything else). The current proposal is not a reduction in the rate we have to pay. It is a reduction in the rate we can deduct. In other words, a tax increase. Saying that this in any way is the same as what Reagan did is ridiculous.
— Bryan K Mar 5, 05:57 PM #
I give 10% of my income to my church, no matter what happens to tax rates. What disturbs me is the signal this administration is sending out, whether it is intentional or not. They seem to be saying that they do not value the inherent good in charitable giving, and that it is government’s place to provide all the services charitable organizations are now providing. To the church, it appears that the government is saying that spiritual improvement (which orindarily increases one’s desire to give more to others and help build a better, more compassionate society) is of little or no value.
— Phil Collier Mar 18, 09:32 PM #