The U.S. economy’s strength and changes in federal tax policy will strongly influence charitable giving in 2018 and 2019, according to new research from the Indiana University Lilly Family School of Philanthropy presented by Marts & Lundy, a fundraising and philanthropy consulting firm.
“We anticipate that 2018 will be an unusual year for philanthropy, with several competing forces simultaneously shaping the giving environment,” Amir Pasic, the school’s dean, said in a statement.
Certain aspects of the new tax policies may have a dampening effect on charitable contributions, according to Una Osili, an economist and the school’s associate dean for research and international programs. “Conversely, overall improvements in the economic environment will likely bolster charitable giving,” she said.
The report presents three scenarios detailing potential effects of the combination of tax policy changes and broad economic conditions on charitable giving in 2018.
Under the report’s “high growth” scenario, the new tax law would build on the momentum generated from the healthy economy at the end of last year.
It says the loss of tax incentives would dampen giving by some households, but the economy’s performance overall would help offset this, and corporate and foundation giving would remain strong.
Since 2004, giving as a percentage of corporate pretax profits has held steady at 0.8% or 0.9%, excepting 0.7% in 2013, despite changes in the political and economic environment during this period.
Under the new tax law, tax-exempt organizations, including foundations, are required to calculate each trade of business activity separately, rather than in aggregate as previously allowed, for the unrelated business income tax.
Despite the change, the report says, some analysts have suggested that the tax law could stimulate foundation giving, thanks to its potential to facilitate the growth of stock portfolios and corporate income. In this event, payout requirements could result in increased grant making in the future.
The report’s “uneven growth” scenario posits that tax policy changes would primarily benefit corporations and wealthy business owners, with minimal trickle-down effects. Although different types of charities would be affected in different ways, estimates for total giving would hold steady.
“The predicted decline in individual giving as a result of tax policy changes is likely to primarily impact organizations middle-income Americans support, such as local charities, congregations and basic needs organizations,” Philippe Hills, president and chief executive of Marts & Lundy, said in the statement.
“These charities could be affected more than large arts organizations and educational institutions that have the resources to more fully engage wealthy donors,” many of whom are generally expected to continue itemizing their deductions.
The report says aggregate giving estimates would mask much of this disparity. It notes that wealthy households already make up such a big portion of individual giving that with enough economic growth, individual giving would increase even if concentrated almost entirely among these households.
In the “flat growth” scenario, tax policy changes would have little effect on economic growth, and donors may adapt to tax policies with fewer gains to the charitable sector, preventing the economy from realizing the full benefits of tax law adjustments. Under these circumstances, the report says, broad implications for charitable giving are difficult to ascertain.
“While the economy should remain an encouraging factor for charitable giving, changes to the federal tax code actually reduce financial incentives for many Americans when it comes to philanthropic gifts and this could result in a sharply different outlook for charities’ fundraising this year,” Hills said.