Published in Nonprofits

Charitable Giving Outlook: Nonprofit execs say tax law changes put chill on fundraising

BY Sunday, November 11, 2018 07:27pm

People give because they believe in the mission of an organization, not because of the tax deductions they can take. 

That’s according to Michael Montgomery, a fundraising and nonprofit management consultant at Huntington Woods-based Montgomery Consulting Inc. 

Although Montgomery thinks charitable giving may decline because of the recent tax changes, individuals might give more because they have more money in their pockets. Still, with the new tax laws significantly reducing the number of taxpayers who itemize, fewer people will be eligible for a tax break for their donations.

“After we see how people file for 2018, we’ll have a better chance and be able to come up with a more definitive answer as to whether tax law changes will influence giving patterns and how that operates going forward,” Montgomery said.

However, data collected through the first half of 2018 by the Fundraising Effectiveness Project showed a 2.1-percent decrease in fundraising revenue. 

Montgomery said this reduction isn’t bad given the uncertainty surrounding the tax laws and the economic climate. 

“Some small donors are sitting on the sidelines this year, which kind of fits with the higher standard deduction and disallowance of a lot of traditional deductions that will radically reduce the number of itemizers,” Montgomery said.

This cascading effect will reduce the 45 million individuals who currently itemize by more than half, according to estimates, which “will have an impact on giving,” according to Montgomery.

“Leaders in the nonprofit community have been nervous. They have anticipated this coming,” Montgomery said of the changes in giving levels. “When people anticipate what they will raise for this year and the fundraising conditions, they’re not as optimistic as they once were.”

‘A double hit’

The Association for Fundraising Professionals speculates the drop in charitable giving could range from $13 billion to $20 billion. Those projections are cause for concern for Donna Murray-Brown, president and CEO of the Michigan Nonprofit Association.

Murray-Brown said predictions for 2017 were pretty accurate with donations to nonprofits increasing by 5 percent in advance of the new tax rules taking effect. She said the tax structure last year was very clear and people took advantage of that with increased giving, but looking ahead, people will have fewer incentives to give at a higher rate.

“We knew there was going to be a surge of giving in 2017 and uncertainty in 2018 with the drop,” she said. “We’ve been hearing anecdotally that there is a little less in the number of donors and that the numbers are not where they need to be.”

Nonprofits also must contend with unintended consequences with changes to the tax rules. Those changes include taxes nonprofits will have to pay for benefits they provide to employees — such as parking or transportation — all of which will affect people and organizations working in urban communities, Murray-Brown said. 

“The new tax rules state that nonprofits have to pay taxes for these expenses,” she said. “Couple that with reductions in giving from donors, and that’s a double hit.”

Despite the challenging projections, the tax laws seem to have had less impact on overall giving than some experts expected, said Jason Franklin, the W.K. Kellogg Community Philanthropy Chair at the Dorothy A. Johnson Center for Philanthropy at Grand Valley State University. He said high-dollar donors will continue to optimize their giving.

“We always see a falloff at maximum giving levels,” Franklin said. “There’s such a huge concentration of wealth today. Millionaire and billionaire sponsors are going far beyond any deduction. Those big gifts — when they get factored into the overall picture, that huge fallout may be related to economic uncertainty among mid-level donors.”

Montgomery said most larger gifts come from assets.

“How people feel about assets is largely a function of how financial markets are doing. The stock market is down from where it was and we’re seeing single-day drops in the Dow,” he said. “This amount of volatility is something we haven’t seen in a long time. The unease people feel as investors translates to the unease they feel as donors. As this volatility continues, giving will slow.”

Cycle ahead? 

The United States economy is in its ninth year of an expansion in what has historically been a seven-year economic cycle, he said, citing a multi-front trade war as a contributing factor to a possible downturn.

Any downturn could impact corporate giving, which is more important in Michigan than in other states, Montgomery said, adding that foundations also will feel the effects.

“Foundations live, breathe and make grants from income on assets. If the income earned declines, grantmaking declines,” he said. “The financial impact on foundations and grantmaking will be long term. Foundation giving will drop slower than individual or corporate giving. We have all these trains running on different tracks toward a single intersection. 

“I’m very certain we’ll see giving decline within the next 12 months.”

At the Johnson Center, Franklin thinks an economic correction will have a huge impact on the sector. He said massive falloffs in the stock market will affect giving by the wealthy, and changes in wages and employment will have more of an impact on smaller and mid-level donors. But what he’s seeing now is the impact of the midterm elections, which have been the most expensive ever recorded, a reflection of the nationwide partisan polarization.

“One of the things I’ve been saying to nonprofits is that in moments like this, staying neutral is less of an option than ever before and that not having a stance is a stance,” Franklin said. “If there are moments of racial violence or anti-Semitism, your work engages with the people involved. If you don’t take a stance, you are supporting those who are defending racism, sexism or homophobia.

“For some groups, the way they meet the challenge is to clearly stake out a set of opinions. You may lose some donors who discover they disagree with you, but you may actually deepen with those who support you.”

Murray-Brown said it takes between three to five years to get a person to give on their own.

“To get a new donor, that cultivation and engagement period is important. What you do with that new donor is when you’ve got your work cut out for you,” she said.

Evolution continues

Consultant Montgomery is advising nonprofit clients to get in front of the economic uncertainty and changes to the tax laws. Nonprofit leaders will need to communicate with their donors and prospects more frequently and compellingly and make their case for support in strong, unambiguous ways in every appropriate context, including mailings, websites, and emails, he said. 

He also encourages nonprofit leaders to look past the tax law change and deliver a consistent story. 

“I am also suggesting that clients check in with their intermediate donors as well as their major donors this year to learn about their future giving plans,” Montgomery said. “With significant donors who express a hesitancy to give because of the tax law changes, I push clients to suggest that those donors ‘bundle’ their charitable giving, making several years’ worth of gifts in a single year in order to make it worthwhile to itemize and be able to potentially take the charitable gift deduction that year.”

Experts contacted for this report noted that fundraising initiatives such as crowdsourcing and peer-to-peer outreach also appear to be gaining momentum, as is using social media to make giving fun and engaging for donors.

“For the overall fundraising, one thing we know is that technology has both changed fundraising and not changed. Changes such as email and social media allow us to reach more people at a lower cost,” Franklin said. “At the same time, digital fundraising, while it continues to grow and expand, it follows fundamentals.

“People who give to an organization are people who know and care about the organization. Email allows us to keep in touch with donors more regularly. On the flipside, we all feel bombarded by the amount of information we get.”

Although Franklin acknowledges the industry will evolve over the upcoming years, “people will continue to give because it is a core element of our culture and our character in this country.” 

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