The Charitable Cliff: Not-for-Profits, Contributions, and the Fiscal Cliff
The charitable contribution deduction, among all tax deductions, has been in the news over the past few months as our leaders in Washington D.C. have struggled to avert the fiscal cliff. Despite the deal reached New Year’s Day, considerable tax changes may still be on the table in 2013. But why do charitable contributions receive a tax deduction in the first place? And how much do charities actually receive in contributions?
Charitable contributions are different than other payments. Typically, when someone provides funds to an organization they receive a product or service in return. However, when someone donates to a charity they do not receive any tangible benefit, making charitable contributions a nonreciprocal transaction. Instead, individuals give to charitable organizations in support of their mission.
Since nearly the beginning of income taxation in the United States, charitable contributions have been classified as a deduction because they are nonreciprocal transactions. The government provides the deduction because income taxes are meant to tax income that has been earned and is available to benefit the taxpayer. Arguably, since they are nonreciprocal transactions, charitable donations decrease that amount, thereby warranting a deduction and reducing the taxpayer’s tax expense burden. Another reason is that by offering the deduction, the government increases the funds available to charities, in effect subsidizing them for performing public good.
Understandably, charitable giving follows the overall strength of the economy and, as the economy has recovered, contributions have increased in recent years. According to the Annual Report on Philanthropy for the Year 2011, conducted by Giving USA at The Center on Philanthropy at Indiana University, charitable giving increased 4% from $290.89 billion to $298.42 billion from 2010 to 2011. The level of giving remained at 2% of GDP for both years. In 2011, individual contributions accounted for 73% of charitable giving while foundations, bequests, and corporations accounted for the remainder. Donations from all sources flowed toward the following classifications of not-for-profit organizations:
- Religious - $95.88 billion
- Educational - $38.87 billion
- Cultural - $13.12 billion
- Humanitarian (Health, Human Services, Public/Society Benefit, and International Affairs) - $104.19 billion
- Other Organizations (Foundations, Environment/Animals, etc.) - $46.36 billion
For charities, the fiscal cliff represents not only possible changes to the tax deduction they rely upon, but also the potential loss of billions of dollars of contributions. In the third quarter of 2012, the U.S. Department of Commerce, Bureau of Economic Analysis estimated GDP to be growing 3.1% for the year. Earlier in 2012, the Congressional Budget Office estimated that the fiscal cliff would result in the economy growing at .5% instead of 4.4%. Using the 2011 charitable contributions data and these percentages, careening off the fiscal cliff will result in charities losing an estimated $12 billion of contributions in 2013, even without considering the probable negative effect any changes to the charitable contributions deduction will have on giving. This amount represents a huge amount of lost charitable services that help to improve our communities.
Giving USA ; U.S. Department of Commerce, Bureau of Economic Analysis ; Congressional Budget Office
For further reading, please see the article Charity and Taxation: Sweetened Charity from the June 9, 2011 edition of The Economist. Also, check out How America Gives, compiled by the Chronicle of Philanthropy, to see how much your neighborhood gives to charity.