I’ve about had it with the endless blathering about the so called fiscal cliff.* There is one nugget in the story, however, that should strike fear and loathing into the hearts of nonprofit executive directors: Whether or not President Obama and Speaker Boehner hold hands as they jump off the cliff, America faces an enormous fiscal challenge that will have to be addressed in the coming years, because we spend more than we take in and have for about the last ten years. As Herb Stein’s Law states, “If something cannot go on forever, it will stop.” The inevitable tax reform that will result is likely to include significant limits on the charitable tax deduction.
While nobody knows what form changes to the charitable tax deduction “loophole” might take, it’s a good bet that the annual total for all deductions, including the charitable tax deduction, will be capped at some number—say $25,000. “So what?” you say. “I’ve got lots of donors and there’ll probably be a minimum gross income, like the currently popular $250,000 per year, that is somehow supposed to equate to ‘millionaires and billionaires.’ And it’s time we stick it to the one percenters.”
But many donation-supported nonprofits have lots of supporters who make small, albeit regular, donations to the cause. As any executive director knows, however, these donors take lots of care and feeding to extract money. As a result, the return on the time investment in getting these donations is fairly small. Instead, for many if not most donor-supported nonprofits, a relatively few large donors actually keep the doors open and the lights on.
Like Las Vegas casinos who depend on high rollers, these donor “whales” are critical to many nonprofits. Just like their casino counterparts, who are charmed by private jets and fancy suites, nonprofit whales also demand perks like a seat on the board, constant phone calls and ego stroking. It’s worth it, though, because the return can be enormous. Thus, executive directors spend a lot of time whale watching, while their underlings curry favor with the everyday donors and volunteers.
Restrictions on the charitable tax deduction will probably make whale herding much more challenging. A typical donor whale might support four or five charities generously. When the tax benefit is capped, as it likely will be, that might drop to two or three. Your nonprofit could be left on the whale watching cruise with nary a fluke in sight.
The good news in all of this is that increased tax revenues from tax reform will mean there will be more government grant dollars up for grabs, or at least fewer extensive cuts.
EDIT: The WSJ ran “Should We End the Tax Deduction for Charitable Donations?“, which engages the same questions as the post above. If the WSJ and other major media outlets are debating this issue, you can bet there’s a real chance of actual changes.