As the scaffolding is coming down around the Washington Monument, we are reminded of the importance of protecting and preserving America’s iconic symbols.
Many might be surprised to learn that the Washington Monument restoration project was only partially funded by Congress on the condition that public dollars would be matched by private contributions. Fortunately, a generous individual stepped forward with the required matching funds.
These changes would in effect increase the after-tax cost of charitable donations for millions of Americans. This could be disastrous for our communities and the thousands of organizations that help them thrive through health, education, job training, culture and more. Before acting, lawmakers should keep some important considerations in mind.
Donations will go down - significantly
Leading economists agree that raising taxes on income used for donations will cause individuals to give less. According to a United Way survey, 62 percent of respondents indicated they would reduce their charitable giving – by 25 percent or more – if the President’s proposal to cap deductions is enacted. A recent American Enterprise Institute study found that donations could decline by as much as $9.4 billion in the first year alone.
Our communities can’t afford that kind of hit, especially since itemized charitable gifts remained some 10 percent below pre-recession levels, according to most recent IRS reports. America’s nonprofits are still struggling to recover from reductions in individual giving in the wake of the Great Recession and it has been predicted that inflation-adjusted individual giving may not recover to 2007 levels until 2016.
Under current proposals, charities would have to forgo a portion of their donations to help close the federal budget gap. In the worst case, if the $7.5 million donated to repair the Washington Monument had to be fully made from after-tax dollars by taxpayers in the highest brackets, they would have to pay $5 million in taxes on earnings of $12.5 million before netting the amount they donated. A single taxpayer earning $50,000 per year in a 25 percent tax bracket would have to earn $1.33 and pay $.33 in taxes to net each charitable dollar.
Our communities and our economy will suffer
Charitable giving represents a lifeline to community services and individuals in need, generating more than $1 trillion annually in the form of vital jobs and services. One in 10 Americans works for a nonprofit organization, accounting for approximately 13.7 million jobs and roughly 9 percent of wages paid in the U.S.
If proposed caps and/or floors on the charitable deduction caused people who itemized deductions in 2011 to reduce their giving by just 20 percent, that would mean a $34-billion drop in charitable giving.
In this event charities and nonprofits would likely cut jobs. Eliminating just 5 percent of their workforce, or 680,000 jobs (assuming average pay rates of $50,000) to make up $34 billion, could increase the U.S. unemployment rate from 6.7 percent to 7.1 percent.
Congress rushed to help save a faltering auto industry a few years ago. The consequence of altering the charitable deduction that has stood the test of time for nearly 100 years, would almost certainly result in significant damage to a part of our economy that employs five times the number of people as the auto industry.
It’s not about the donor
Some seem to believe the charitable deduction is just another giveaway to the wealthiest among us.
Not so. Regardless of tax rates, it always costs money to make a charitable gift. Many of the wealthiest only pay effective rates of 10 to 15 percent. Yet, those earning far lower salaries often pay higher rates. A police captain and nursing supervisor in New York City earning a combined income of about $200,000 now pay marginal state and federal income taxes in excess of 30 percent. Are these the “rich” who should be taxed – in whole or in part – on earnings used to make their charitable gifts?
The real burden would fall on millions who depend on the generosity of donors – not the donors themselves. Donors just have to reduce their giving to a level that requires the same pre-tax income as before. .
The Washington Monument is an iconic symbol of American democracy. So is our vibrant voluntary sector. Preserving both of them will ensure they stand strong as symbols of America for generations to come.
Sharpe is president of the Sharpe Group, a philanthropic consulting firm with offices in Memphis, Washington, Atlanta, and San Francisco.