In the Wake of Tax Reform, Nonprofits Are Counting on Strong Economic Performance

As soon as the Tax Cuts and Jobs Act of 2017 was signed into law, companies, nonprofit organizations, individuals, and accountants began to scramble to determine what it meant for them. Coming at the end of an historic year for the stock market, the legislation was expected to further fuel the market's dramatic rise — and it did, for a time. Whether the trend will continue through the end of 2018 remains to be seen.

One way or the other, one sector that will be affected is philanthropy. On its face, the near doubling of the standard deduction for individuals and couples means that significantly fewer filers will itemize their deductions, reducing an important incentive to give. We may not know the full impact on charitable giving for several years, but for 2018 and 2019 philanthropic organizations could certainly benefit from greater clarity with respect to the legislation and its provisions.

If the economic momentum we saw in 2017 continues through the end of 2018, it will be tough to argue that tax reform had nothing to do with stepped-up economic growth and strong fundraising results. The doubling of the standard deduction and the loss of the tax incentives that come with itemization undoubtedly will dampen giving by some households, but the overall economic gains will offset those losses. Furthermore, as corporations benefit from substantially lower tax rates and foundations' endowments benefit from stock market gains, their grantmaking is likely to remain robust and even increase. So in this “high growth” scenario, philanthropy is likely to be unaffected.

If, the market stumbles, however, the old saw that "a rising tide lifts all boats" will no longer apply, as predictions that changes to tax rates could end up concentrating most of the benefits at the top end of the income scale come to pass, resulting in widely uneven economic impacts across different sectors.

In this "muddle-through" scenario, organizations that rely on smaller donations from less wealthy donors are likely to be hurt the most, as middle-class economic gains from the tax bill fail to materialize and a decline in itemizing by individual tax filers who opt to take the doubled standard deduction leads to a decline in giving by this population. Indeed, if the benefits of the bill accrue disproportionately to the wealthy, as some have predicted, nonprofits that depend on gifts and donations from high-net-worth individuals could very well flourish, while those relying on smaller donations may see their fundraising revenues stagnate or decline.

An increase in corporate giving also is far from a given if economic growth isn't enough to offset the decrease in tax-incentivized giving, or if overall consumer sentiment weakens. Foundations are likely to hold their own in this scenario, but nonprofit organizations will want to track their fundraising streams closely to make sure that decent (but not necessarily robust) economic growth and middling market returns don't sneak up on them.

In the worst case for charities and nonprofits, uncertainty and unintended consequences stemming from the swift pace at which the legislation was moved through Congress could result in a flat-growth scenario. In such a case, full implementation of the legislation gets bogged down in the IRS, the Treasury Department, and/or the courts. Having been written and passed quickly, the legislation creates an unexpected amount of confusion and nobody is able to provide a satisfactory level of clarity.

In such a case, individual giving is likely to be muted, at least temporarily, with already strapped households exploiting loopholes that lower their marginal tax rate and/or delaying some of their giving until the process works itself out. Additional unintended consequences (unforeseen at the moment) could create other challenges, with the confusion surrounding the bill likely to dampen giving not just by households and individuals but across the entire philanthropic sector.

Now, I understand that philanthropy and charitable giving are not solely driven by tax incentives. But for many households, businesses, and foundations, the ability to write off a charitable donation and receive a tax benefit is part of the calculus that governs when and how much they give. Nonprofit organizations that depend on the generosity of others may indeed come out of 2018 stronger, but that is likely to depend on multiple factors all breaking in their favor.

It is still too early to tell, but everyone in the nonprofit and philanthropic sectors would be wise to plan ahead with each of these scenarios in mind. Philanthropically minded donors and foundations and the organizations that rely on them have much riding on the economic performance of the U.S. economy over the next couple of years. Organizations that are able to adapt will be the ones most likely to thrive, while those that don’t will not be so lucky.

Philippe G. Hills is president and CEO of Marts & Lundy, an international fundraising consulting firm. Working with the Indiana University Lilly Family School of Philanthropy, Marts & Lundy recently presented The Philanthropy Outlook 2018 & 2019.