In part one of this series I introduced you to ALICE. A segment of the population incapable of bearing the weight of a personal financial event. We also outlined the importance of the non-profit agencies which support both the traditional “poor” and ALICE. These organizations rely on the charity of the public to continue to operate.
Charity is not an invention of modernity. The first recorded instance of charitable giving was circa 2500 BCE when the Hebrews used a mandatory tax, or tithe, to benefit the poor. Augustus, the first Roman Emperor, used government funds to provide aid to over 200,000 people, just before the turn of the millenium. In 1180 CE, Moses Maimonides authored the “Mishneh Torah” which included the Eight Levels of Charity. The first fundraising drive in America was organized by Harvard University in 1643. Alexis de Tocqueville, in 1835, published “Democracy in America” which identified the philanthropic spirit of Americans as one of the country’s primary strengths.
It wasn’t until the 1900s that charitable giving became associated with the federal income tax. The 16th Amendment, adopted in 1913, gave the federal government in the U.S. the ability to collect income tax. (Less than one percent of the population earned enough income to be taxed at the time.) Charitable organizations were exempt from paying. A few years later, in preparation to enter the first world war, Congress passed the Revenue Act in 1916. It raised the lowest income tax from 1% to 2%, while adding provisions for estates and businesses.
Despite the increase in income tax providing historic levels of revenue to the federal government, it wouldn’t be enough. Just one year after the Revenue Act, Congress passed the War Revenue Act. This raised the income tax to an astronomical level of 16% for anyone earning more than $40,000 a year. If you were earning over $1.5 million, the tax rate was 67%. In addition to the cries of government thievery, charitable organizations feared there would be no money left for any philanthropic support. The War Revenue Act included the ability to deduct charitable contributions from federal taxes owed. And voila, giving as we know it today was born.
Since then, the tax code has been rewritten, reformed, changed, updated and compounded into complexity. With its constant metamorphosis, the ways to make gifts to NFPs have also changed. Charitable gift annuities, securities, charitable lead trusts, charitable remainder trusts, donor advised funds…all inventions of those wishing to fulfill their philanthropic interests while taking advantage of the tax benefits to them in the present and their future estate.
Of course, people support non-profits for more reasons than the benefit of lowering their tax bill each year. But recent changes will put that to the test. Through legislation last year, the standard deduction was raised. Doubled, actually, for both single people and married couples. For the average person, giving enough money to charitable causes in order to receive a deduction on their federal taxes will be difficult. There is little doubt the landscape of large philanthropic gifts will change. Non-profits are concerned the increased standard deduction will deter people from giving all together. A reversal of the intent of the War Revenue Act 100 years ago, to insure the survival of charitable organizations through uncertain times. If the pundits are correct, NFPs are right to be worried.
Consider this: according to the Internal Revenue Service, 152 million individual tax returns were filed in 2016. Of those filed, 40 million of them accounted for 80% of the dollars given to charitable organizations. Based on the way those tax returns were itemized, and with the implementation of the increased standard deduction, the Tax Policy Center estimates a 62% drop in individuals taking a deduction for charitable donations. The Joint Committee on Taxation estimates this will reduce giving to NFPs by $13 billion next year.
Through independent study, using the information provided through the sources above, POLITICO determined that 62% decrease in individuals using the charitable giving deduction will come from households earning between $75,000 and $200,000. What does that look like on a more local scale? Two years ago, 915,399 of the tax returns filed in Indiana were for incomes ranging between $50,000 and $250,000. Not quite one third of the total returns filed in the state that year. That segment represents $93,741,527,966 of income (yes, you read that correctly) or an average of $102,405 per household. Even though the income guidelines of that group are slightly outside the estimated margin of households in the study by POLITICO, it’s relatively safe to assume the impact will only be greater.
A common misconception is the larger organizations most of us are familiar with, American Cancer Society, United Way or the Salvation Army, take gifts made at a local level and disburse them across the country. While some dollars move up the chain of umbrella organizations, the majority of the money stays local. I’m confident people would be amazed if they knew how reliant local, small NFPs are on the larger conglomerates. That’s not necessarily a bad thing from a giving perspective. An individual that gives to ACS might intentionally do so, knowing their gift will go to the greatest local need. That includes free rides to doctor visits or treatment, research funds to local clinics and hospitals, research dollars to local higher education institutions and more. All classified as non-profit organizations. That is also a traditional way of giving born out of a relationship built on longevity and name recognition among older generations.
Younger generations are far more focused. As the perceived power of the individual resurges, so too does their sense of charity. It is a phenomenon that is counterintuitive to our digital world because these young donors want to literally see where their dollar is going. Millennials may not have much to give, but what they do have is important to them. They are far more likely to give to a small organization with one employee that provides free books to children at one local elementary, than to an umbrella organization which takes a top-down approach. Not to mention, we’re talking about a generation experiencing far different economic conditions than their parents. A willingness to share income, which is drastically limited for most after incurring student loan debt, should be a positive indicator of American culture.
It is unlikely smaller, annual gifts of even a few hundred dollars will go away. For as many tax returns that itemize charitable gifts, there are millions of non-itemized filings which don’t include specific giving amounts. Probably because the gifts, while meaningful, don’t alter the tax outcome for the individual. Or, they represent the rare instance when the individual is giving for the sake of it, and nothing more. The experts are concerned about that middle group discussed above. The average charitable gift in 2014 was over $2,500. According to the current federal income tax brackets, those households would fall into the 22% category if they are married filing jointly, giving them a $550 reduction in their overall tax bill. If 62% of that middle segment population in Indiana stops giving an average amount of $2,500, that’s a $1.53 billion hit to local charities, their employees, and the demographic they serve.
It’s a bit confounding. The changes to the standard deduction don’t prevent people from making charitable contributions. Some argue that giving will continue to grow, despite a decrease in the number of gifts made. This is a trend seen nationally for the last fifteen years. As economic conditions have improved, the perception is the middle class has also improved in quality of life. It is the higher earners that have the most to gain from taking advantage of tax deductions and it’s no secret they will want to continue to receive that benefit. But the data collected by United Way proves the perceived increase in quality of life for the middle class is only manufactured. Charitable contributions may grow, but so will ALICE as she consumes more products. At the end of the day, it will be the NFPs that support that constituency who will continue to struggle.
‘I like the Walrus best,’ said Alice: ‘because he was a little sorry for the poor oysters.’
‘He ate more than the Carpenter, though,’ said Tweedledee. ‘You see he held his handkerchief in front, so that the Carpenter couldn’t count how many he took: contrariwise.’
‘That was mean!’ Alice said indignantly. ‘Then I like the Carpenter best—if he didn’t eat so many as the Walrus.’
‘But he ate as many as he could get,’ said Tweedledum.
This was a puzzler. After a pause, Alice began, ‘Well! They were both very unpleasant characters—’
From Through the Looking Glass by Lewis Carroll
In the next part of this series I talk with Richard Payonk, Executive Director of the United Way of the Wabash Valley, and explore what local organizations are doing to prepare for the times ahead.