Charitable Tax Deductions Won’t Save U.S. Nonprofits – Leslie Lenkowsky

Charitable Tax Deductions Won’t Save U.S. Nonprofits is Professor Leslie Lenkowsky’s take on the relationship between inflation and charity. Here’s what Lenkowsky has to share:

High inflation is hitting America’s charities. Donations last year dropped by 3.4% from 2021 levels, or 10.5% after adjusting for inflation, according to the Giving USA report released this week. Never in its more than 60-year history has this annual report recorded so steep a single-year decline in real dollars. Researchers at Indiana University’s Lilly Family School of Philanthropy, who produce the report with the Giving USA Foundation, cited declines in real income and the stock market.

Charitable Tax Deductions Won’t Save U.S. Nonprofits Leslie LenkowskyThe decline in giving understates the challenge. Many nonprofits receive more revenue from earnings—fees for medical and social services, tuition, event tickets and the like—than donations. As rising prices strain budgets, charities encounter buyer resistance. The Girl Scouts have struggled with the effects of inflation on cookie sales. Since staff salaries are a large portion of charities’ spending, demands for higher wages also play a role.

According to Giving USA’s inflation-adjusted estimates, all three main sources of philanthropy—corporations, individuals and foundations—cut back last year. At 6.4%, the decline in individual giving measured in nominal dollars approached that of the Great Recession, when philanthropy plummeted. Factoring in 2022’s inflation more than doubled the drop.

All kinds of charities saw giving slide. Inflation-adjusted declines for education and “public-society benefit” organizations (such as political advocacy, community development and policy research groups) exceeded the national drop, while giving to the arts, environment and human services almost matched it. Donors kept supporting religion and healthcare at close to 2021 levels.

This year may be almost as bad as 2022. If the Biden administration and Congress are serious about cutting federal spending, charities may also face cutbacks in government grants and contracts—second in importance to earned income for nonprofit revenue. If economic growth slows, that would make things worse.

Charitable Tax Deductions Won’t Save U.S. Nonprofits

A bipartisan group of U.S. senators, backed by thousands of nonprofits such as the YMCA and the United Way, insist on another reason for the decline: the lack of a tax incentive for most Americans to support charities. That’s why senators and charities are promoting a new deduction for giving. But the tax break the lawmakers propose is unlikely to spur giving and may make inflationary pressures worse.

They want to make everyone eligible for a tax break for donations. Because the 2017 tax law substantially enlarged the standard deduction, only 10% of taxpayers now itemize.

Depending on how it is designed, this “universal” deduction may not lead to more giving, but simply reduce taxes for the half of all American households who already donate to charities. It would also add to the Internal Revenue Service’s administrative challenges and cost the federal government billions in lost revenue. A more generous tax break is of little use to an individual who, because of inflation, unemployment, or other reasons, can’t contribute money to charities in the first place.

When prices began to rise in 2021, inflation-adjusted giving held steady. A strong economy and stock market that year, combined with appeals to tackle Covid-related problems, helped charities maintain the support they received the previous year. But 2022 was different and the nonprofit world suffered. Whether that continues depends more on effective policies to lower inflation and spark economic growth than on a new tax deduction.

Mr. Lenkowsky is an emeritus professor at Indiana University.

Charitable Tax Deductions Won’t Save U.S. Nonprofits was first posted by the Wall Street Journal

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