As the new administration prepares to take office, donors and nonprofit organizations can expect some changes. Although details of President-elect Donald Trump’s budget and tax plans are not yet clear, most political observers agree that we can expect the following:
- Cuts in domestic spending. Trump has said he would reduce such spending by 1 percent a year, with Medicare, Medicaid and Social Security exempt.
- Cuts in income tax and corporate tax rates.
- A cap on tax deductions.
Let’s take these one by one to gauge the potential impact on nonprofits and philanthropy.
Cuts in domestic spending
Nonprofits who rely on government funding, especially in such areas as housing, education, immigrant assistance, the environment, and health care, are likely to see less government support. Some nonprofits will merge for economies of scale; many may need to develop more non-government funding.
These budget cuts and changes in policy make it likely that more federal policy work will be transferred to the states. Individuals with a “less government” mindset may believe that relying on local nonprofits to address the need in their communities is more efficient than relying on government services. Individuals who disagree with this sentiment may also support local nonprofits, in an effort to insulate their community from some of the changes in Washington.
Cuts in income tax and corporate tax rates
The Tax Policy Center estimates that Trump’s tax plan would reduce individual giving by 4.5 to 9 percent, or $13.5 billion to $26.1 billion in 2017. Cutting taxes on the wealthy will reduce the value of the charitable tax exemption. Although tax cuts may reduce charitable donations from the wealthy in the short run, more money in donors’ pockets might increase their giving to those issues that are especially important to them.
For businesses, cuts in tax rates may shift more corporate giving away from pure philanthropy and into cause marketing and sponsorships, which are recognized as business expenses for tax purposes.
Cap on tax deductions
Trump’s proposed cap on itemized deductions, as well as his plan to raise the standard deduction, could depress tax-deductible giving. According to the Tax Policy Center, the charitable tax deduction is expected to be limited to $100,000 for individuals, $200,000 for couples.
Some nonprofits are already working with members of Congress to exempt charitable donations from any caps on deductions. If they are successful, the exemption would likely mean increased giving.
IN THIS LANDSCAPE, WHAT IS THE STRATEGY FOR NONPROFITS?
Although some might be tempted to take a wait-and-see attitude about changes ahead for domestic spending and tax policy, nonprofits who are proactive may be at an advantage. Given the expected changes, here is what we recommend:
Make advocacy a top priority: Nonprofits should be calling their elected officials and talking about the importance of preserving the charitable tax deduction and demonstrating the cost-effectiveness of their services. Nonprofits will have to be more engaged with elected officials to help shape public policy, especially at the state level. It’s crucial now that a nonprofit demonstrate to citizens, the media and government officials the impact that the organization has.
Shore up and build local support: Community-building is key. Some communities will want to insulate themselves from some of the changes happening at the federal level, and one way to do that is by supporting their local nonprofits who are filling the gaps. Now more than ever, nonprofits have to be visible and relevant in their communities.
Sooner is better than later: If some nonprofit funding shifts, as expected, from public sources to private sources there will be more competition for philanthropic dollars. Nonprofits don’t have the luxury of not knowing what to do. Would a merger with a compatible non-profit make sense financially and programmatically? Can you effectively demonstrate excellent return on investment? Do you have the necessary advocacy, marketing and fundraising capacity?