Why Nonprofits Should Support Obama’s Proposed Budget Plan

What are the pros and cons of President Obama’s proposed 2010 budget plan for the philanthropic and nonprofit community and society more generally? It appears that when we weigh the costs and benefits, nonprofits and citizens generally will come out ahead. Unfortunately, most of the organized philanthropic community (not necessarily representing most nonprofits) and several politicians have come out against the changes, narrowly framing the issue around what impact the proposed tax changes will have on the wealthiest donors.

But the wealthy donors’ perspective is only part of the story (and a perspective that has dominated philanthropy for too long). It is also very unclear as to whether or not the tax changes really will have a net negative effect on donors’ giving. It’s important that we recognize that the budget plan represents a fundamental shift in the role of government and philanthropy in our society—a shift in the interest of the greater good.

Proposed Tax Changes

President Obama has proposed a 2010 and beyond budget that will, beginning in 2011, reduce the value of the charitable deduction for the very wealthiest of Americans (taxpayers in the top two tax brackets, about 1.2% of households) while also increasing taxes for this group so that government support may be increased for many areas traditionally served by nonprofit organizations, including the President’s priorities: education, health care, and clean energy.

In particular, President Obama proposes limiting the charitable deduction to help pay for reshaping the nation’s health-care system. According to the Chronicle of Philanthropy:

His proposal would affect families that have more than $250,000 in income, beginning in 2011. Instead of saving 33 or 35 cents for each dollar donated, as they do now, those taxpayers would save 28 cents under the Obama plan. Mr. Obama’s overall budget proposal would also increase the taxes owed by the wealthiest taxpayers from 33 or 35 percent up to 36 and 39.6 percent of their income in 2011. In effect, the proposed budget would increase the cost of giving to charity for wealthy donors by reducing the amount of money they can deduct from their taxes.

The Effect on Giving

The Center on Philanthropy at Indiana University, using 2006 data, estimates that:

Giving by high-income households would have been 4.8 percent [$3.9 billion] less if President Obama’s proposed limits on charitable deductions, and increases in taxes owed by the wealthiest Americans were in effect then. (The Chronicle of Philanthropy).

Alternatively, the Tax Policy Center estimates a $9 billion reduction in annual giving. The change would affect roughly 12 percent of individual charitable contributions.

But, the Center on Budget Policies and Priorities finds the proposal will reduce total charitable contributions by only 1.3 percent.

It’s not clear to what degree these estimates account for the fact that as, Robert F. Sharpe Jr., a fund-raising expert in Memphis, was noted as saying in a recent article in the New York Times, many of the wealthiest donors are already limited to deductions of 28 percent for their charitable gifts because they are subject to the alternative minimum tax.

Furthermore, according to the Giving Institute and GivingUSA, which produces an annual assessment of giving in the U.S, “Obama’s proposal to trim the deductibility of charitable donations from the current 35 percent to 28 percent over time is not necessarily going to change giving patterns of generous Americans.”

Other areas of Mr. Obama’s budget plan would also encourage charitable giving such as through the proposal to retain the estate tax, which is due to expire in 2010. That tax provides an incentive for wealthy people to give to charity as a way of lowering the tax liability on their estates after they die (The Chronicle of Philanthropy). A 2004 CBO study estimated that repeal of the estate tax would cut contributions by between $13 billion and $25 billion in 2000. Obama’s budget would retain the estate tax, which on net would likely boost contributions by more (compared with the repeal) than limiting the deduction would cut them, according to the Tax Policy Center.

The irony in this debate is that most wealthy donors don’t give because of the tax deduction. According to a recent article in the Chronicle of Philanthropy, discussing last year’s Bank of America report on wealthy donors:

Nearly 52 percent of wealthy donors said their giving would remain the same if they no longer received any income-tax deduction for their donations, while 54 percent said their level of philanthropy would remain unchanged if the estate tax were repealed. That said, a significant minority (47 percent) of people in the survey reported that they would give less if they could no longer claim a deduction for their charitable gifts. Of those respondents, 37 percent said their contributions would “somewhat decrease,” while 10 percent said their gifts would “dramatically decrease.”

Of course, President Obama is not suggesting we eliminate the tax deduction, just lower it by a few cents.

So, based on the evidence above, it is hard to tell to what degree tax changes will ultimately affect giving, if at all.

In addition, The Chronicle notes that as nonprofits are worried about funding now—in the face of the economic crisis—these tax changes could create a surge in giving in the short-term as wealthy donors rush to make gifts and take advantage of the higher current deduction levels. Many nonprofits are undergoing financial strain with the economic downturn and could really use a surge in giving.

Reframing the Discussion

But in many ways, the actual bottom-line effect on giving is beside the point. Shouldn’t those of us in the nonprofit and philanthropic community also be concerned with our clients’ perspectives, our middle and lower-income donors’ perspectives and what is best for society generally?

It is hard to deny that the wealthiest individuals in this country have had a pretty easy time of it over the past few decades (at least up until the recent economic downturn). The growing gap between the richest and the rest of us grew to such a degree that Paul Krugman described the early part of this decade as a new Gilded Age. The number of households with a net worth of $1 million or more has grown from 3.5 million in 1994 to an estimated 9.9 million in 2008. An entire industry catering to this mega-wealthy minority group emerged during the last decade, including the cottage industry of philanthropic advising for the wealthiest of Americans.

Meanwhile, giving from these wealthy individuals has not increased in proportion to their increases in income and wealth. If one analyzes the past 30 years, charitable giving in the U.S. continues to amount to about 2% of personal income and 2% of U.S. GDP. According to Burke: “as measured by individual contributions as a percentage of after-tax (disposable) income, Americans became less generous despite great increases in standards of living, education, and the reach of liberally oriented mass media since the 1960s” (p. 185). Recent data, from 2000 to 2005 from the Urban Institute, show that there was virtually no change in level of giving if measured in constant (inflation-adjusted) dollars, though the U.S. economy expanded by more than 12 percent and total personal income increased by more than 7 percent. Today, only 12.3% of nonprofits’ revenue comes from private giving (this percentage is different for different sub-sectors of nonprofits-see below).

While the philanthropic industry campaigns to keep current tax incentives for wealthy donors, assuming these wealthy will give, they direct little or no attention to where this money might actually end up. The beauty of philanthropy is that donors can choose where to give their money. However, the other side of the equation is that philanthropic particularism (the way nonprofit organizations, their donors and volunteers choose to focus on particular causes) invariably affect who benefits from voluntary efforts.

Empirically-based research strongly suggests philanthropic giving does not go to those most in need. According to GivingUSA, private donations go primarily to religious organizations and private higher education rather than to areas like human services (although part of this funding gets funneled through to help the poor, a large portion stays in the religious organization to benefit church members).

Because high income donors give more to education, health, and the arts (including large institutions — particularly colleges and universities and academic medical centers), raising taxes on big earners might disproportionately hurt those parts of the philanthropic sector but perhaps not smaller organizations providing social and other services:

• Wolpert estimated a decade ago that only 10 percent of charitable contributions are targeted to the poor. [1]
• A recent study sponsored by Google and conducted by the Center on Philanthropy at Indiana University found “less than one-third of the money individuals gave to nonprofits in 2005 was focused on the needs of the economically disadvantaged. Of the $250 billion in donations, less than $78 billion explicitly targeted those in need.”
• Similarly, a 2007 study by the Institute for Jewish and Community Research found that only 5% of the total dollars from mega-gifts (gifts of $1 million dollars or more) go to social service groups.

Data also suggest that nonprofit organizations that rely heavily on philanthropic donations are less likely to serve the poor:

• Salamon found in a 1992 study of human service organizations that the majority of organizations studied did not provide services or advocacy for the poor. Of 1,474 agencies reporting on whether they served poor clients (family income below the official poverty line), only 27 percent indicated that most of their clients were poor. Another 20 percent indicated that they served some poor clients (between 21 and 50 percent of the total client base), suggesting that the remaining 53 percent had few poor clients (below 20 percent). Among those that did serve the poor, the bulk of their funding was from government sources as opposed to private giving. [2]

It appears that President Obama’s budget will bolster many areas served by many nonprofits, while reducing the need for nonprofit services in these areas. For example, he focuses on health care as reason to introduce the tax changes he has proposed. According to the Center on Budget and Policy Priorities, President Obama’s

…health reform proposal aims to provide health coverage to most or all of the 45 million Americans who are now uninsured. Currently, people without health insurance receive some free care from hospital emergency rooms, neighborhood health clinics, and other charitable organizations.  Health reform will greatly reduce the burden on non-profit organizations to provide free health care, thereby offsetting to a significant extent the overall drop in contributions.

Certainly, if more Americans could afford health care, and could be more proactive in addressing health care concerns, the demand (and costs) for many health and human services provided by nonprofits would go down. People could spend more money on other things like, for instance, the arts or education, or giving more money to charity, rather than spend it on health needs, as more and more Americans must do today. Nonprofits might also come out ahead if heath care is available to their own employees as nonprofits, like other employers, have struggled with the rising cost of healthcare.

In particular health and human services nonprofits have, for decades, asked for and needed more government support for the work they do. The cuts and changes to government funding have put a big strain on these nonprofits and they want more help from government to meet needs. The President’s proposed budget would mean more government funding in these areas and government funding is typically more stable and causes less goal displacement than private contributions, though it also puts process and structure constraints on nonprofits. [3] Overall, given resource dependencies and the particularistic nature of philanthropy, government funding is necessary for organizations working in health and human services.

Getting to the Point

Beyond all of the arguments above, what also matters is that President Obama’s proposed changes to the tax code would be more equitable—under current tax rules, wealthier people get bigger tax breaks than middle-income ones when they donate to charity because currently people in higher tax brackets get larger deductions. According to a White House representative quoted in the Chronicle,

That means wealthier people get bigger tax breaks than middle-income ones when they donate to charity. “If you’re a teacher making $50,000 a year and decide to donate $1,000 to the Red Cross or United Way, you enjoy a tax break of $150,” he wrote. “If you are Warren Buffett or Bill Gates and you make that same donation, you get a $350 deduction — more than twice the break as the teacher.”

But even more importantly, this budget plan represents a fundamental shift in how we think about the role of government and philanthropy in our society and ultimately how we live together and take care of one another as fellow citizens living in a just society. Mr. Kallina, an advisor to wealthy donors, was quoted in a recent Chronicle of Philanthropy article as saying:

“Bluntly, this proposal allows the government to choose the charitable recipient rather than the donor….The government is cutting back on our ability to give to charity, because they want to dictate where the charitable dollars go.”

Yes! That is exactly the point!

The proposed budget represents a shift in thinking about our rights and responsibilities as citizens. A shift from choice by a few to more choice for the many. It is a shift from allowing the wealthiest to accumulate vast sums of wealth and then voluntarily and in a fragmented fashion “help out” where they see fit (with the assumption that the richest people are smarter than the government and the rest of us, and will always make the most socially beneficial decisions), to requiring the wealthiest to share the burden of supporting a society from which they’ve obviously benefited a great deal in recent decades, where democratically elected representatives, with input from citizens, rather than the wealthiest, decide in a more holistic fashion where best to distribute resources that will provide a base-line of support for citizens.

This is the change many of us voted for but, as we’re discovering rather quickly, this kind of change is not easy. We have to ask ourselves, do we really want change or do we want more of the same? If we want change, we’ve got to start with changing who decides.

[1] Wolpert, Julian. “How Federal Cutbacks Affect the Charitable Sector.” In State Devolution in America: Implications for a Diverse Society, edited by Lynn Staeheli, Janet E. Kodras, and Colin Flint, 97-117. Thousand Oaks, CA: Sage, 1997.

[2] Salamon, Lester M. “Social services.” In Who Benefits from the Nonprofit Sector?, edited by Charles T. Clotfelter, 134-73. Chicago and London: The University of Chicago Press, 1992.

[3] Froelich, Karen A., “Diversification of Revenue Strategies: Evolving Resource Dependence in Nonprofit Organizations.” Nonprofit and Voluntary Sector Quarterly, 28(3): 246.268.