Nonprofits See Cloudy Giving Forecast, but the Facts Suggest Sunshine

The just-released 2018 edition of “Giving USA” brings glad tidings to the nonprofit world. In 2017, charitable gifts by Americans totaled $410 billion. That’s 3 percent more than in 2016, even after adjusting for inflation — a sign that the strong economy continues to power philanthropic giving.

But don’t expect fundraisers and other nonprofit executives to break out in smiles when they read the report, published annually by the Giving USA Foundation and based on research by Indiana University’s Lilly Family School of Philanthropy. (We are both affiliated with Indiana University but are not involved in the production or publication of “Giving USA.”)

To the contrary, more than half of the 357 foundation and nonprofit leaders surveyed earlier this year by the Center for Effective Philanthropy worried that giving would decrease in 2018, largely because of the new tax law. Just 19 percent of the high-level foundation officials surveyed, and 14 percent of the nonprofit executives, disagreed with this gloomy prediction.

Marts & Lundy’s “The Philanthropy Outlook 2018 & 2019,” published in February in partnership with the Lilly Family School of Philanthropy, also offered a mixed forecast, bordering on pessimistic. While strong economic growth would help, scholars said, changes in the new tax law would reduce financial incentives to give. At best, the “Outlook” judged, forecasting philanthropy in 2018 was going to be “especially challenging.”

Why the Optimism Gap?

At least the views expressed in the Marts & Lundy report and the Center for Effective Philanthropy survey are somewhat more bullish than nonprofit leaders’ nearly unanimous view during last year’s tax debate that the new legislation would be a clear disaster for philanthropy. Why is there such a wide gap between the optimism of “Giving USA” and the persistent pessimism of nonprofit leaders? Will the “Giving USA” results change their minds?

Probably not, for two reasons.

First, the pessimists would argue that the cheery results of 2017 are artifacts of gaming and timing.

In this view, the growth of philanthropy last year substantially reflected donors’ efforts to take advantage of the old tax law’s more favorable provisions for giving, before they expired and were replaced by the supposedly less-encouraging terms of the new legislation. For example, because the new law lowers income-tax rates, charitable tax deductions were worth more to higher-income taxpayers last year than they will be this year.

In addition, the larger standard deduction going into effect this year means fewer taxpayers will find it worthwhile to itemize — and, if they don’t itemize, they can’t take deductions for their charitable donations. The new law also reduced corporate-tax rates and exempted more estates from tax; critics of the law contend these changes will further decrease giving.

By giving extra amounts in 2017, the argument goes, donors got tax benefits that will be less valuable under the new rules in 2018. So, last year’s record giving figure included donations that would otherwise have been made in future years (and now might not be made at all).

What’s more, financial companies and community foundations reported higher-than-expected 2017 contributions to donor-advised funds. These gifts are tax-deductible in the year they are made, even though the money does not have to be distributed to charities until subsequent years. Thus, these gifts, too, could have enabled donors to reap the benefits of the old tax law before the new one came into effect – and could have inflated the 2017 “Giving USA” figures.

But there are several reasons to doubt the extent to which donors were really motivated by tax concerns.

For starters, it wasn’t clear until almost the final week of 2017 that the tax bill would become law. Congress had a protracted debate over the measure that at various points seemed likely to quash the tax legislation entirely. By time the bill was signed, much of the 2017 giving had already occurred, and there wasn’t much time left for 2018 charitable tax planning.

As for contributions to donor-advised funds, they have been increasing rapidly for several years. These gifts are probably more the result of the surging values of stocks and other assets frequently used to endow such funds than of tax avoidance. And no matter why people made them, 2017 contributions to donor-advised funds will ultimately make their way to charities — as will the 13.1 percent more money “Giving USA” found was donated to foundations last year compared to 2016.

Signs of Health

The other reason for nonprofit leaders’ pessimism doesn’t involve overall levels of giving; it is the fact that a larger share of charitable support now comes from a narrower spectrum of wealthier donors, like those with the means to give to donor-advised funds and foundations.

Indeed, the 2017 tax law was criticized for being likely to exacerbate this trend: By doubling the standard deduction, it would reduce the number of less-wealthy donors who could benefit from itemizing their gifts to charity. If these donors gave less, the shape of giving as a whole could shift to organizations and causes most favored by upper-income donors (such as higher education and the arts) and lead to a decline in civic involvement by lower- and middle-income Americans.

These are not exactly new — or unimportant — concerns. Ever since foundations were created, people have worried that giving by the wealthy might displace giving by average Americans. However, as with the issue of tax avoidance, there is reason to doubt the pessimistic view. Neither “Giving USA” nor other studies suggest that the health of the nonprofit world is taking a sudden turn for the worse.

Although individual donors’ share of all giving is lower than it was a generation ago, giving by individuals — at all income levels — still accounts for 80 percent of philanthropy in the United States. (That figure includes charitable bequests.) In contrast, the share coming from corporations and foundations has grown only modestly.

To the same point, the Chronicle reports that a lower proportion of households makes contributions than did so in 2000. But the number and composition of American households have changed substantially in the past 18 years, so it is hard to gauge the significance of the change.

A study by the Fundraising Effectiveness Project that examined giving to a sample of nonprofits in the first quarter of this year found that revenues from small gifts (below $250) actually increased compared to the same period in 2017. Total donations were 2.4 percent lower than they were in the first quarter last year, but this decline is much less than critics of the impact of the tax law had predicted.

“Giving USA” also reported that the number of charities in 2017 exceeded the number in 2010, returning for the first time to the levels seen before the Internal Revenue Service revoked tax exemptions for hundreds of thousands of organizations that failed to file information about their operations. Whatever the explanation for this resurgence, it is hardly a sign that nonprofits are losing their appeal to Americans.

A reversal of the country’s economic fortunes could, of course, make the outlook for giving for the rest of 2018 less favorable. But philanthropy seems far from heading into the kind of catastrophic state forecast by critics of last year’s tax bill. In fact, philanthropy might do even better if foundation and nonprofit leaders expressed more optimism.

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.