New Pew Report Sheds Light on Tax Deductions and Philanthropy

[Publisher's Note: Michael J. Rosen, CFRE will be interviewed by CausePlanet in a free webinar about his award-winning book, Donor-Centered Planned Gift Marketing. Learn more and register for the October 17 program by clicking HERE. If you need a speaker or trainer, contact Rosen today.]

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A new report issued by the Pew Charitable Trusts provides valuable insights into the effect that tax deductions and credits have on charitable giving. The report comes at a critical time as federal and state governments continue to look for additional sources of revenue including cuts to charitable-giving tax deductions.

The Pew report, written by Elaine S. Povich, looks at the impact of tinkering with tax write-offs for charitable giving in a number of states including Kansas, Michigan, Missouri, New York, North Carolina, and Vermont. The report nicely summarizes the impact of tax policy on philanthropy:

Tax incentives for charitable giving directly affect donations, particularly from high-income donors, according to Jon Bakija, an economics professor at Williams College. ‘Tax incentives for charitable donations in the US succeed in causing donations to increase, probably by about as much or more than they cost in terms of reduced tax revenue,’ he wrote in a paper published recently by the journal Social Research.”

Bakija went on to write:

This strengthens the case for the tax subsidies for donations.”

In an illuminating case study, the Pew report looks at what happened in Hawaii when the state government imposed a cap on the charitable giving tax deduction. According to Mallory Fujitani,Money Grab by Steve Wampler Photography via Flickr of the Hawaii Department of Taxation, the state expected the move to generate about $12 million to the state treasury. Unfortunately, the move cost charities $50 million to $60 million in lost donations, according to Tim Delaney, President and CEO of the National Council of Nonprofits.

In other words, Hawaii found that for every new dollar of tax revenue it generated from the cap on the charitable giving deduction, charities lost five dollars!

David L. Thompson, Vice President of Public Policy at the National Council of Nonprofits, summarized the experience of the various states that have tinkered with the charitable giving deduction:

What we learned in the states is that the charitable deduction is not just a nice thing for taxpayers, it’s vital to the communities. All politicians from across the political spectrum have come to the same conclusion that we are hurting our communities by discouraging giving to charities.”

Given the crystal clear Pew report, the experiences of various states, and the findings of academic research studies, a number of important questions come to mind:

● Why do government officials and some pundits continue to advocate for reducing the tax deduction for charitable giving?

● Why does the Obama Administration continue to support a cap on charitable tax deductions that could cost the nonprofit sector as much as $5.6 billion per year?

● Why do so many nonprofit professionals fail to defend tax deductions for charitable giving?

The nonprofit community can no longer simply go along with government money grabs. We can no longer lie to ourselves by saying, “Donors will give us money anyway.”

We know better.

I’ve told you so before. Now, Pew is telling you. Tax deductions encourage charitable giving. Reducing or eliminating tax incentives for giving reduces giving.

That’s why we must defend tax deductions for charitable giving.

If nonprofit professionals do not energetically support tax incentives for charitable giving, the sector cannot expect others to take up the fight. It’s not about being selfish. It’s about making sure we have the necessary resources to benefit those we serve.

Here are five things you can do:

1. Monitor your state legislature and the US Congress for bills attacking charitable giving incentives.

2. Join your state’s nonprofit association and its government relations committee, if it has one. Join your local chapter of the Association of Fundraising Professionals and join its government relations committee, if it has one. If either does not have such a committee, start one.

3. If you see legislative action to cap or eliminate charitable giving incentives, write and call your elected representatives to defend the incentives. You can cite the Pew report when you do.

4. Involve your board members and encourage them to write and call their elected representatives. Remember, many of your largest donors are also the largest donors to the politicians in your community.

5. Develop an action plan before you need it.

That’s what Michael Rosen says… What do you say?

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8 Comments to “New Pew Report Sheds Light on Tax Deductions and Philanthropy”

  1. Michael,

    This report offers concrete evidence why the charitable deduction needs to stay in place, yet surprisingly, there are those who still continue to push for its reduction or eradication. For some bizarre reasoning, they believe that the government should be the ones providing the services that charities have provided for decades. In my opinion, when the government gets involved with social programs there is a great deal of money and energy wasted in excessive administration. I agree that we must continue the fight to provide this incentive for donors.

    • Richard, thank you for commenting. There are many thoughts swirling around our society and even within the nonprofit community:

      Some believe that people will continue to give at current levels without any tax incentives. The Pew report should put an end to that, but I suspect some true-believers will continue to ignore the facts for a variety of reasons.

      Some believe that government, rather than nonprofits, can better meet community needs. I can’t even respond to this one.

      Some believe that wealthy donors only support universities, museums, and arts organizations rather than “real” charities. Of course, this is foolish. First, many wealthy donors do support social service charities. Second, by supporting universities, wealthy donors help people avoid the need for social services. Third, supporting museums and arts organizations enhance everyone’s quality of life and the general economy.

      Some actually want the government to control more of our lives. I’m definitely not one of those folks. America is all about protecting the rights of the individual from government.

      Even those who believe that tax incentives work fall victim to apathy, complacency, or denial.

      Not all donors are inspired by tax incentives. However, there’s certainly compelling evidence that many are. Tax incentives encourage many people to give and give more than they otherwise would. To borrow a Martha Stewart-ism: That’s a good thing.

  2. Congress is ill-advised to limit the charitable income tax deduction for all the reason stated in the Pew report. As government persists on finding ways to reduce its own deficit, the flaw in their thinking is that the nonprofit sector can and will be able to pick up the shortfall. I suspect that where this will be felt most is a limit on the gifts from major donors and potential major donors. Removed from the proximity of the need-based populations which are served by many charities due to their own personal wealth, a primary incentive for many is the income tax deduction.

    We should not kid ourselves. In Virginia there are several tax credit initiatives which relate to services for needy populations. The tax benefits are so very attractive that there is virtually no cost associated with the making of a gift. Absent these programs or the exhaustion of available credits, it has been our experience that the gifts simply do not flow. Presumably, the tax writers have figured this out such that these programs are revenue neutral when all parties are considered.

    • Philip, thank you for your comment and insights. There is now compelling evidence that tax incentives encourage people to give, inspire people to give more, and point donors to where they should consider giving. For a variety of reasons, many will choose to ignore the evidence. However, smart nonprofit professionals will do what they can to preserve a policy that works, not just for nonprofits but the people they serve.

  3. Thank you for bringing this to our attention, Michael. While previous studies/surveys indicate that tax incentives are not a primary motivation for giving, they do affect levels of giving and, I would infer, the types of gifts. This tells me that the initial connection with a potential donor results from an affinity for the cause or the organization. Understanding that the tax incentives drive larger gifts and planned gifts, nonprofits must build one-to-one relationships with potential major donors in order to get the best possible results. If you are measuring fundraising results effectively, it will become clear that time and money allocated to building relationships is an excellent, long term investment.

    • Bonnie, thank you for commenting. You’re right. Previous research has shown that tax incentives are not a “primary motivator” for charitable giving. Even allowing for social desirability bias, I still suspect that tax incentives are not a primary motivator for a couple of reasons. First, we know from research that other powerful motivating factors are at work when it comes to charitable giving including reciprocity, desire to support mission fulfillment, etc. Second, a donor can receive the same tax benefits by giving to any charity. Therefore, tax incentives will not guide someone to give to a particular charity. However, certain tax credits for gifts to certain types of charities (i.e.: social service causes) can inspire donors to give to certain types of organizations, just not a specific one. Third, not all donors care much or at all about the tax incentives.

      Now, having said all that, I do have to point out that for some donors, tax incentives are very important. They can inspire some people to give. And they can inspire some donors to give more than they otherwise would. Depending on the kind of incentive, tax deductions and credits can guide donors to give to certain types of organizations. However, even when tax incentives are a powerful influencer, they will still not determine precisely where someone will give.

      So, as you’ve stated, relationships are key. Nonprofit organizations should not make the mistake of marketing tax incentives. Relationships, organizational efficiency, mission fulfillment, stewardship, and actually asking are all critically important to securing donations. Tax incentives are important. But, I agree with you, development involves so much more.

  4. I’ll play devil’s advocate here and suggest that we don’t really know what removing tax incentives for charitable giving will do until we’ve lived with it for longer than one tax cycle. We haven’t necessarily given it a chance to work.

    There’s a general tendency to jump to long-term conclusions based on short-term evidence in many ways in our society. By offering tax incentives for charitable giving for so long, we’ve created a link between taxes and giving in our culture. So initially we can expect giving to decrease. That doesn’t mean that once people are accustomed to philanthropy being philanthropy rather than a tax-reduction strategy, we won’t return to previous levels.

    Isn’t it pretty cynical to conclude that philanthropy is essentially a tax-reduction strategy for the wealthy in our society? If that’s what it is, all our high-minded claims for philanthropy are hollow.

    • Jean, thank you for your comment. You make an interesting point. Like you, I’d be interested in seeing some long-term tracking. However, we really already have the answer. In states with new, special charitable giving incentives, giving has increased compared to the previous years. So, if the incentives are removed, logic would lead us to believe that giving would return to the pre-incentive levels. Why would they return to the incentive levels without an incentive?

      I also want to take this opportunity to provide some clarification. You wrote: “Isn’t it pretty cynical to conclude that philanthropy is essentially a tax-reduction strategy for the wealthy in our society?” First, I never suggested that that was the case. Second, there is no evidence to suggest that philanthropy among the wealthy is primarily a tax-avoidance strategy. However, tax incentives do play a role. That’s not cynicism; it’s fact.

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