Nonprofits Have It Wrong About the Tax Law — and Why Their Lobbying Failed

Even though nonprofits have rung alarm bells about what’s next after their lobbying losses on the new tax law, 2018 may turn out to be a better year for the nation’s charities than you would have guessed. That means it’s essential for nonprofits to question how they handled their advocacy in the past year and adopt new approaches that demonstrate an understanding of congressional skepticism about charity claims and behavior.

The new tax law lacks a key provision promoted by nonprofits — one that would have enabled all taxpayers, not just those who itemized on their tax returns, to deduct their giving.

On another issue of concern, Congress didn’t eliminate the estate tax as the White House had wanted, but it did lower the already-small number of estates subject to the tax. That could further reduce the incentive to make bequests to gain tax savings. Congress also cut income-tax rates for high earners and corporations, thus reducing — in the view of philanthropy experts — the incentive to give.

And while the “Johnson Amendment,” which forbids charities from getting involved in partisan politics, survived — much to the relief of many nonprofits — the Trump administration has directed the Internal Revenue Service to go easy on enforcing it.

These developments have produced an atmosphere of gloom, even despair, among philanthropic leaders.

Independent Sector CEO Dan Cardinali, in a year-end letter to his members, unwittingly sounded like President Trump when he called the new tax law “the most significant piece of tax legislation for the nonprofit sector in the last 100 years.” He warned that it “undermines civil society and exacerbates inequality, placing our country on the wrong path.” He vowed to fight on.

After a steady diet of such claims from their national associations, it’s no surprise that many heads of local charities are facing 2018 with trepidation.

Hard to Forecast

In today’s volatile world, anything can happen, including war or economic collapse. But, barring such catastrophes, the outlook for charitable giving will almost certainly be different from, and probably better than, the dire predictions we’ve heard during the tax debate and afterward.

One reason has to do with the inevitable limits on the ability to forecast the impact of a complex set of policy changes like those in the Tax Cuts and Jobs Act.

For example, the most widely circulated estimate of the law’s consequences for charitable giving came from studies of proposals that were similar but by no means identical to the provisions in the actual bill.

What’s more, no direct evidence at all was presented — indeed, none existed — on the central point of contention: how giving would change if fewer people could claim a tax deduction for their charitable gifts. Researchers relied on what we know about taxpayers who do and don’t itemize their deductions, but they had no way of knowing how people would behave if the bill’s provisions — particularly the enlarged standard deduction — changed them from itemizers into nonitemizers.

Measuring What Is Measurable

There is a more general point here: Economic forecasts can only measure what is measurable.

Nobel Prize-winning economist Edmund Phelps, in a piece written with Roman Frydman, recently applied this principle to the tax debate: “The very reliance on … supposedly scientific estimates draws attention away from the other consequences of the tax bill, such as its impact on economic dynamism and resulting innovative activity or health and educational outcomes.”

For charitable giving, ignoring this lesson has meant overlooking a variety of ways in which the new law might spur donations.

Foremost among these is its potential to stimulate the growth of stock portfolios and corporate incomes. Thanks to rising stock-market prices in 2017, foundations have already seen double-digit increases in their endowments; if the new tax law leads to continued growth, they will be required to make substantially larger grant payouts in the future. Indeed, it’s a safe bet that we’ll see a renewed debate about raising the payout rate above its current 5 percent of asset values.

Wealthier individuals may also give more if their assets grow. True, some of the same groups that have publicly worried about declines in giving don’t think this increased generosity by the wealthy would be a good thing. They are concerned that by enabling the rich to play a larger role in philanthropy, the new tax law will result in less support for charities serving the needy. But that, too, is largely unknowable; and it reflects disagreement about where philanthropic dollars should go rather than the new law’s effect on the overall amount of giving.

Corporations also stand to gain from provisions of the tax bill. What they will do with any increased profits is impossible to say for sure; predictions have been all over the place. If experience is any guide, however, spending more in their communities is likely to be one of the uses to which they’ll put their funds. Some businesses, in fact, have already begun.

That kind of “dynamic” impact received much less attention during the debate over the Tax Cuts and Jobs Act than the “supposedly “scientific” forecasts of losses due to an increase in the standard deduction or elimination of the estate tax. Yet the growth-inducing features of the tax bill may well prove to be more significant in the long run.

This lesson is worth remembering as a new legislative session begins.

Federal Spending

For many charities, government funding provides more revenue than donations. However, partly because of concerns about the federal deficit and doubts about how well major programs, such as Medicaid and SNAP (food stamps), are working, both the White House and Congress plan to scrutinize federal spending this year.

The philanthropic world is apt to react defensively at first, the way it did with the tax bill.

As it has done since the Reagan years, it will commission experts to show how the policy changes under consideration will produce sizable losses in revenues — and will use those estimates as a basis for opposing the changes.

But on this issue, philanthropy will have much more difficulty speaking with one voice than it did during the debate on the tax bill. Federal programs affect different parts of the nonprofit world differently. Moreover, with midterm elections on the horizon, other political pressures will undoubtedly loom larger than the protests by nonprofits.

If nonprofits want to avoid a repetition of last year’s nearly fruitless lobbying efforts, they should take seriously — and respond constructively — to criticisms of the programs they run with direct aid from the federal government. If charities simply argue that spending cuts would cause them short-term fiscal problems, they’re no more likely to be successful than they were in forecasting large declines in giving as a result of the tax bill.

Honestly assessing whether proposed changes would improve federal programs will be more difficult to do, but it may be more persuasive.

Leslie Lenkowsky is an Indiana University expert on philanthropy and public affairs and a regular contributor to these pages. He and Suzanne Garment, a visiting scholar at Indiana University, write frequently on philanthropy and public policy.