March 12, 2009 | Read Time: 5 minutes
The unveiling of President Obama’s first budget has prompted a mixed reaction in the philanthropic world. On the one hand, the proposal marks a clear shift toward increased spending of the kind that nonprofit groups have long favored, especially in education and health. On the other hand, it would reduce the incentive for the very rich to give by curtailing the value of their tax deductions.
As a result, leaders in the nonprofit world are confronted with a tough choice: Do they favor greater government spending? Or increased charitable giving? If they cannot have both, a recent statement that many of them signed suggests they would prefer a more active government.
That would be a mistake.
The statement, “Forward Together: Empowering America’s Citizen Sector for the Change We Need,” calls for both immediate and long-term steps to increase government’s role in supporting the nation’s charities. To aid in the economic recovery, it asks for expanded government aid for organizations that serve the needy, and additional investments in buildings and other facilities used by nonprofit groups. For the future, it proposes creating a commission to develop principles for improving collaboration between government and philanthropy; a “social innovation” grant fund, and other measures, to strengthen the management and operations of charities; and expanding national-service programs.
Drafted under the auspices of the Johns Hopkins University’s Listening Post Project, the statement, which has attracted more than 100 prominent signatories in the nonprofit world, does not overlook the role of giving and volunteering. It recommends trying new incentives to increase donations of money and time, including charitable deductions for people who don’t itemize on their tax returns, and restoring the estate tax after it expires, in 2010, which many fund raisers believe plays an important role in encouraging people to make bequests. It also suggests increasing the amount that people can deduct for travel and other expenses incurred in volunteering.
But the weight of the statement is clearly on the side of more government support in areas of interest to philanthropy. Indeed, it even calls for a “permanent institutional presence” to improve the nonprofit world’s ability to deliver public services “at all levels of government.”
The Obama administration’s proposed budget includes money for a social-innovation fund and expansion of national service. (An Office of Social Innovation has already been set up in the White House.) It sets aside billions of dollars to overhaul the health-care system, although details remain to be developed. It requests additional spending for child care, preschool programs, and aid for college students. And it calls for an initial sum of $1-billion to be placed in a National Affordable Housing Trust to assist low-income families. Those ideas have won applause in the nonprofit world.
The proposed tax change has not. The Obama administration’s budget seeks to lower the tax savings that families with incomes exceeding $250,000 (for single taxpayers, $200,000) can get from charitable giving. Instead of 33 or 35 cents for each dollar in donations (depending on their tax brackets), the Obama plan would allow them to receive just 28 cents. Combined with a proposed increase in the top personal-income-tax rate, this seemingly small reduction, according to the Center on Philanthropy at Indiana University, could have cut itemized charitable giving by nearly $4-billion in 2006, the most recent year for which data are available.
Although the Council on Foundations, Independent Sector, and other nonprofit coalitions have already expressed concern, how harmful this reduction would be is in dispute. Some observers have pointed out that the economic downturn has been far more costly. A survey sponsored by the Bank of America recently found that half of high-net-worth donors would not lower their charitable giving at all, even if they received zero tax deductions for their contributions.
In any case, say experts on philanthropy, a large share of the contributions from affluent donors go to museums, symphonies, well-endowed universities, religious organizations, and other recipients that may not do much for the needy. If restricting charitable tax deductions is necessary to help raise the revenue to meet the Obama administration’s spending proposals — and it is forecast to produce nearly $180-billion over 10 years — then the trade-off could be worthwhile.
But nonprofit leaders would be foolish to accept such a deal. Reducing incentives for philanthropy among the very wealthy, who account for about one-third of donations made by individuals, is too large a price to pay for what the rest of the Obama budget promises.
One reason is that the efforts proposed for health care, education, and other areas are often still unproven and, in the case of overhauling the health-care system, still undecided.
Moreover, as the statement issued by the nonprofit leaders suggests, government has not always been a good partner. While attempts to improve collaboration could be useful, the Obama administration’s plans for a sizable expansion of government activity will magnify the difficulties of working together while also increasing expectations of success. A well-financed, but incompetent, heavy-handed, overregulating government is no friend of nonprofit organizations, and potentially a major opponent.
In addition, restricting the deductibility of charitable donations will also restrict philanthropy’s ability to obtain the resources that allow it to act independently of government. Even though much of it may be in support of elite institutions, giving by the very wealthy is substantial enough to underwrite a wide range of causes, including those that challenge government priorities. Especially if government is to play a more dominant role in American life, as the Obama administration seems to wish, a vibrant nonprofit world — and the private giving necessary to sustain it — should become more important, not less.
Eliminating $4-billion in charitable giving would be the equivalent — and then some — of shutting down the Bill & Melinda Gates Foundation for one year and zeroing out the impact of Warren Buffett’s contributions to that philanthropy. Such an absence just might be noticed.
To be sure, if nonprofit leaders defeat the proposed reduction in the charitable tax deduction in Congress, charities may avoid such losses. But the real challenge in President Obama’s budget is not just the change in the charitable tax deduction. It is also the era of large government that the budget seeks to usher in.
Leslie Lenkowsky is a professor of public affairs and philanthropic studies at Indiana University and a regular contributor to these pages. His e-mail address is llenkows@iupui.edu
