Imagine a group of children settling in for a sleepover in a history museum. Clad in their pajamas, the kids are just about to crawl into their sleeping bags when the lights dim and the adventure begins. The guards explain there is a problem with the power grid and say they need to move to a safer location. As they pass through the darkened museum corridors and stairwells, the children are surprised to encounter historical figures come to life.
This “Night at the History Museum” is an educational event at Pittsburgh’s Heinz History Center that Director Andy Masich says “can be a life-changing experience for a child.” In Pittsburgh, such innovative museum programming is refreshingly common— thanks in part to an unusually generous community of benefactors. Despite the economic downturn, Charity Navigator—the largest nonprofit evaluator in the U.S.—ranked Pittsburgh as the nation’s most charity-conscious city in 2010, based in part on the community’s strong giving patterns.
But even here, such institutions and their programs could be in jeopardy if current proposals to reduce the charitable giving tax incentive go into effect. In a city like Pittsburgh, that could mean fewer individuals making charitable donations. This could have a damaging effect on institutions like the Heinz History Center, which three years ago reduced its budget by approximately 15 to 20 percent, making cuts to exhibits, programs, publications and personnel.Skip over related stories to continue reading article
Numerous cultural institutions have been forced over the past few years to trim budgets due to the strained economy. What would the landscape look like—in Pittsburgh and elsewhere in the U.S.—if the charitable giving tax incentive is reduced?
Currently the nation’s wealthiest people are able to write off 35 cents of every dollar donated to charities or spent on certain other deductible items such as mortgage interest. President Obama has proposed limiting the value of charitable and itemized deductions for upper-income taxpayers, capping the deduction at 28 percent, regardless of whether the individuals are currently in the 33 percent or 35 percent tax brackets. Under the proposed change an upper-income taxpayer making a $100,000 donation would save $28,000 in taxes, $7,000 less than is currently the case. This would include married couples with a minimum adjusted gross income of $250,000 or an individual with an adjusted gross income of at least $200,000.
David L. Thompson, vice president of public policy at the National Council of Nonprofits in Washington, D.C., says this is bad news for museums, which tend to receive support from wealthier donors. “I am seeing the economic data across the board showing already reduced spending and giving,” he says. “This is seen as one more shoe dropping.”
The president’s plan is only one of several current proposals by Washington policymakers that would also reduce the value of itemized deductions for some or all taxpayers (see sidebar, p. 37).
“We view the proposed changes with concern. We are hopeful that it won’t have an impact on individual or corporate giving, but I don’t think anyone knows the impact until it happens,” says Masich of the Heinz History Center.
In the case of Masich’s institution, more than 50 percent of the total money raised from individual donations comes from a small number of wealthy supporters, according to Audrey Brourman, a fundraising consultant for the center. The institution has approximately 4,000 individual donors whose giving makes up 18 to 20 percent of the organization’s $7.4 million annual budget.
Some institutional leaders believe that America’s tradition of charitable giving will continue even if tax laws change. “Not to say we aren’t concerned about the proposed changes, or that we think they are a good thing… But we have done some polling and some analysis of our membership, and tax incentives aren’t what really drives them,” says Judith O’Toole, director of the Westmoreland Museum of American Art in Greensburg, Pa., 35 miles southeast of Pittsburgh. The relationship with the museum, people, collection and accessibility drives Westmoreland members and donors, according to O’Toole.
Yet some nonprofit advocacy groups such as the Washington, D.C.-based Independent Sector and the National Council of Nonprofits argue that the charitable giving tax incentive plays a bigger role than many realize, influencing both the total value and quantity of donations from taxpayers. “Conventional wisdom is that people give because they want to, but they give more because of the incentive,” says Thompson. “In December, when you are deciding whether or not to give, you are motivated by the tax incentive.”
Because year-end giving is so strong, most groups have a December donor campaign. More than 20 percent of annual online charitable donations are made on Dec. 30 and 31, according to a 2010 study by Network for Good and TrueSense Marketing.
Polling shows it isn’t only charities that support keeping the giving tax incentive in place. An April 2011 Gallup poll found that 71 percent of American taxpayers oppose eliminating the charitable deduction to lower the overall income tax rate, and 68 percent oppose eliminating the charitable deduction to reduce the federal budget deficit.
It is easy to get lost in the numbers, but Barbara Luderowski, founding director of the Mattress Factory, a Pittsburgh-based contemporary art museum, sees the proposal to reduce the charitable giving incentive as more than just numbers. “When they reduce the encouragement we have to offer someone, it may not be a huge slice out of our general income, but it is a huge cut out of our psyche and it says we don’t count,” she says.
On the positive side, Luderowski says being in a highly philanthropic area like Pittsburgh is a benefit to groups like hers. “The arts culture does receive a lot of support from foundations in the area,” she says.
For now, groups continue to advocate against the proposed changes while staying mission-focused. Should changes come to pass, Masich says his center may face more budget cuts. “We are going to have to be innovative,” he says. “All the things that are in our toolkit now, we are just going to have to get better and better at and not rely on one funding source exclusively.”
Proposals to Alter the Charitable Deduction
Obama 28 Percent Limit
President Obama has proposed limiting the value of charitable and itemized deductions for upper-income taxpayers, capping the deduction at 28 percent, regardless of whether the individuals are in the 33 percent or 35 percent tax brackets. This proposal has been included in the president’s American Jobs Act, his deficit reduction plan submitted to the super-committee, and his first three annual budget proposals.
12 Percent Tax Credit
The National Commission on Fiscal Responsibility and Reform (Bowles-Simpson Commission) empaneled by President Obama recommended significant changes to the federal tax code, including converting the current charitable itemized deduction into a 12 percent, nonrefundable tax credit available to all taxpayers, but only for donations above 2 percent of Adjusted Gross Income (AGI).
15 Percent Refundable Credit
The Bipartisan Policy Center’s Debt Reduction Task Force issued its own set of recommendations for deficit reduction that included cutting individual income tax rates and reducing the number of tax brackets, and eliminating the charitable deduction and replacing it with a 15 percent refundable tax credit payable to nonprofits.
Congressional Budget Office report
The Congressional Budget Office issued a report in May 2011 projecting the potential impact of 11 proposals to alter the charitable giving incentive in the federal tax code. The report found that both charitable giving and federal tax receipts would increase if Congress either (a) applied the tax deduction to all taxpayers (itemizers and non-itemizers alike) but imposed a minimum floor on contributions of $500 for individuals and $1,000 for couples, or (b) converted the deduction to a 25 percent tax credit for everyone who gave more than the $500/$1,000 floor.
Proposal to Cap Value of Itemized Deductions
Harvard economics professor Martin Feldstein, who serves as president emeritus of the National Bureau of Economic Research, presented a proposal to cap the value of all itemized deductions, including charitable giving, mortgage interest, and state and local sales taxes, at 2 percent of adjusted gross income (AGI). Although some of Feldstein’s writings have suggested that Congress exempt charitable giving from the cap, no congressional proposal containing this version of the Feldstein plan has yet been offered.
—Excerpted from councilofnonprofits.org
Sue Hoye is a Washington, D.C.-based freelance writer and has written extensively for the Chronicle of Philanthropy.