When federal tax reform takes full effect, Michigan expects that a majority of the people who have itemized their federal tax returns in the past won't anymore because of the increase in standard deductions.
And that has charities worried that donations could decline because those taxpayers won't be able to get a tax write-off any more for that philanthropy.
“Charitable giving incentives are not 100% of the solution, but people give more when there are incentives,” said Joan Gustafson, external affairs director at the Lansing-based Michigan Nonprofit Association. “When that tax break isn't available, we've seen over and over that the amount people give is less.”
The Washington D.C.-based National Tax Policy Center estimates that charitable giving nationally will decline by between $12 billion and $20 billion in 2018, or between 4% and 6.5% as a result in of the increase in the standard deduction and the decrease in the number of taxpayers who itemize their federal taxes.
In addition, the exemption for the estate tax doubled under the tax reform bill, meaning that the wealthy can pass on more of their riches to their heirs without tax implications. The Tax Policy Center predicts that this will reduce the incentives for the wealthy to make charitable contributions, and could end up reducing philanthropic bequests by between 15% and 30% nationally, or roughly $4 billion.
That puts charities and nonprofits in a challenging position at a time when they're expected to do more as government subsidies and services also decline.
“The need just continues to grow in all of our communities and nonprofits are out there decreasing the burden on government and trying to help vulnerable populations,” Gustafson said. “And this doesn't help us.”
About 27% of Michigan households itemize deductions on their federal tax forms to get credit for things such as charitable contributions, according to the state Department of Treasury. But with the federal tax reform passed by Republicans in Congress before Christmas doubling the standard deductions to $12,000 for individuals and $24,000 for couples, the number of people who itemize is expected to drop to about 10%, said Howard Ryan of the Treasury Department.
That means the filer won't be able to write off charitable contributions, leaving a question about whether people will stop making or reduce the donations they make to charitable organizations. Taxpayers who continue to itemize their federal returns will still be able to get a tax break from their charitable donations.
“It's certainly a deterrent,” said Charley Ballard, an economics professor at Michigan State University. “The average taxpayer who itemizes in 2017, but won't in 2018, will see a substantial increase in the net price of giving.”
As a board member of the Lansing Symphony Orchestra, Ballard sees the issue on both macro and micro levels.
“Any arts organization, whether it's the theater or ballet, depends on ticket prices to cover a third of your costs. That means the other two thirds will have to come from somewhere else,” he said. “We kind of look at the tax reform and say, 'Gosh, our job just got a little bit harder.'”
Others are hoping for the best.
David Sowerby, a portfolio manager and managing director of Ancora Holdings in Bloomfield Hills, said the federal tax relief package will put more money in the pockets of residents across the nation, leading to healthy amounts of charitable giving with or without a tax write-off.
“The impact is going to be much less than the skeptics and curmudgeons think,” he said. “I would contend that, ultimately, charitable giving is much more influenced by forces such as the economy growing. Is my investment portfolio increasing? Do I have a good soul? Those are so much more important components in charitable giving than what is the tax deduction.”
Ballard also acknowledges that there is an intangible, altruistic aspect to charitable giving.
“We will still be itemizing next year. But if we were to not itemize, we wouldn't all of a sudden tell our church that we're going to renege on our pledge,” he said. “And how do you explain to little Jessica that I'm not going to contribute to Girl Scouts because of the change in the tax law?”
Rick David, director of Lighthouse of Oakland County, a Pontiac-based social services agency, is cognizant of the changes in the tax law and the ways it might affect charitable giving.
“It's a concern, but we're optimistic at Lighthouse. If our donors have given historically, they'll continue to give,” he said. “But for people who are episodic givers, those are the ones I'm more concerned about. They may have given a significant gift. But it's not part of their DNA to give.”
With the tax changes still so fresh, many charities still are trying to determine whether they'll have to redouble their fundraising efforts.
At Forgotten Harvest, which distributed 45 million pounds of food last year to needy residents in metro Detroit, spokesman John Owen said the only certainty in the tax reform debate is that the need for food hasn't gone away.
"But the community has always come through for us," he said. "We hope that level of support will continue."
And at United Way of Southeast Michigan, an umbrella organization that raised and contributed more than $45 million to more than 120 charitable organizations in the 2015-16 fiscal year, Chief Marketing and Corporate Development Officer Chris Perry said they're bracing for the impact.
“United Way for Southeastern Michigan has not seen any impact as of yet, but of course any adverse change in the tax deduction could have a substantial negative impact on organizations like ours, and ultimately on the lives of the individuals we serve,” Perry said in a statement to the Free Press.
For Lighthouse and for charities across Michigan, leaders realize that there are people who might need a bit of a nudge.
“We're just going to have to work with donors in a new way,” David said. “We've been here for nearly 50 years and we're just going to have to let them know that we're a special place that's deserving of their dollars.”
Contact Kathleen Gray: 313-223-4430, firstname.lastname@example.org or on Twitter @michpoligal.