Will tax reform be naughty or nice for isle charitable giving?

January 7, 2018 |

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EDITORIAL | INSIGHT | ISLAND VOICES

Will tax reform be naughty or nice for isle charitable giving?

By Curtis K. Saiki Posted January 07, 2018 January 7, 2018

Updated January 7, 2018 12:05am

BURST Comprehensive surveys have consistently found that donors make charitable gifts not for tax benefits but because they are passionate about a cause.

While the season of holiday giving has ended, the season of charitable giving has just begun with fair intrigue and reasonable concern as to whether the recently enacted federal income tax reform will prove “naughty or nice” for local nonprofits in 2018 and beyond.

While the tax reform preserves the charitable deduction and even increases the deductibility of cash gifts from 50 percent to 60 percent of adjusted gross income (AGI), it significantly increases the standard deduction for married couples from $12,000 to $24,000.

The Tax Policy Center estimates that with such a large standard deduction, 27 million itemizing

taxpayers may choose the standard deduction in 2018. That’s a 58 percent decrease in itemizing taxpayers. This alone could lead to less charitable giving, since the charitable deduction is only available to those who itemize. And while we can’t say how this ultimately affects Hawaii, we have historical references to work from.

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In 2015, 161,000 of Hawaii households itemized their federal tax returns generating $656 million to charities. Based on the estimates around the new tax laws, if 93,000 (or 58 percent) of Hawaii itemizing households choose the standard deduction in 2018, there is a reasonable basis to expect a decrease in giving to our local charities.

How much less? While no local studies are available, a national study by the Indiana University Lilly Family School of Philanthropy concluded that increasing the standard deduction and decreasing the top marginal tax rate would decrease annual giving by $11 billion and $2 billion, respectively, resulting in a decline of $13 billion in charitable contributions annually to the nonprofit sector. Other studies suggest a greater loss.

On the flip side, all studies projecting losses are well grounded in economic modelling and therefore naturally limited in that there is much more to charitable giving than economics and taxes. People typically give from the heart first, the head second. Comprehensive surveys have consistently found that donors make charitable gifts not for tax benefits but because they are passionate about a cause.

And if history means anything, despite charities’ fears at the time, reported charitable giving actually increased in the years subsequent to the Tax Reform Act of 1986, which like the 2017 tax reform act increased the cost of giving by increasing the standard deduction and decreasing marginal tax rates. One reasonable theory for this: more money in the pocket allowed folks to give more.

Of course, we won’t know the answer to the $13 billion bogey until years from now. Yet it is undeniable that we don’t have time to wait and see. Here’s one reason why.

Expected cuts in discretionary federal funding in 2018 will significantly impact the bottom lines of local nonprofits, which provide necessary support and assistance to the elderly, homeless, disabled, hungry and disenfranchised. Unfortunately, these organizations, serving the most vulnerable segments of our local population, already operate on shoestring budgets. It could mean the end of stipends to support young and old volunteers for many community organizations, the deterioration of legal representation for the most vulnerable, as well as funding for programs such as Meals on Wheels.

And while these organizations are working in extraordinary fashion to ramp up their individual fundraising and advocacy efforts, it is clear that the gap caused by the expected federal funding cuts would already be too large to cover by private donations. Unfortunately, the tax reform

may exacerbate this already grim projection if it turns out that the “glass half-empty” projection holds true.

Given the incredible stakes at play for our local community, it is much better to err on the side of caution. We must take proactive steps in whatever way we can to prevent the potential loss of funding from becoming a reality.

Let’s make Hawaii’s charitable glass “half-full” by utilizing our special cultural commodity that defines and separates us from the other states. It is the “aloha spirit.” Avoiding a decline in local giving will require each and every one of us to reasonably leverage it.

Curtis K. Saiki is senior vice president of development and general counsel at the Hawaii Community Foundation.

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