By Collin Slowey
When the Tax Cuts and Jobs Act of 2017 was put into law, it was with the intent of supporting American businesses and workers. Unfortunately, it presented a number of unintended, potentially negative consequences for the work of faith-based organizations (FBOs) and the nonprofit sector in general. Namely, the increased standard deduction and reduced top tax rate seemed likely to greatly reduce the amount of money annually given to charities.
On March 26 of this year, the Faith & Giving Coalition, an ecumenical network of FBOs dedicated to supporting and advancing charitable giving in the U.S., held a telebriefing on the effects of the Tax Act so far. Regrettably, the new code has acted as experts predicted it would and has had a deleterious effect on charitable giving, among other things. However, the telebriefing also highlighted a number of new bills going through Congress, any of which could bring a silver lining to the dark clouds currently hanging over FBOs.
The Tax Act So Far
When the Tax Act was being developed in early 2017, experts in the world of FBOs and nonprofits more generally reacted strongly to new regulations that looked like they would have negative effects on American charitable giving. A report produced by researchers at Independent Sector and the Indiana University Lilly School of Philanthropy produced a particularly striking forecast. Brian Walsh, executive director of the Faith & Giving Coalition, put it this way:
Doubling the standard deduction [the amount citizens can deduct from their income before taxation] would reduce the fraction of taxpayers who itemize [charitable donations]—and are thus incentivized by charitable donations—from 33 to 5 percent. Lowering the top marginal tax rate for individuals from 39.6 percent to 35 percent would further reduce the tax incentive to give.
The report predicted that the new tax code would bring down charitable giving by an annual $13.1 billion; furthermore, it predicted this would disproportionately affect FBOs.
The Tax Act underwent changes before finally becoming law; nevertheless, it appears to have had many of the expected effects on charitable giving. The Faith & Giving telebriefing highlighted the fact that while U.S. current dollar GDP grew by 5.2% in 2018, charitable giving only grew by 1.6%. Walsh referred to this gap as “very concerning” and much larger than one would hope for. Moreover, even though the amount of donated money technically increased, the number of donors decreased by 4.5%, and the yearly donor retention rate dropped by 6.3%. According to the Fundraising Effectiveness Fund, which produced this research, the new tax code may have helped cause these changes, though its full effects likely won’t be felt for some time.
Walsh pointed out several other negative effects the Tax Act and the current administration has had on FBOs. The new regulations have curtailed the tax-free status of parking provisions that churches and other nonprofits provide for their employees. In addition, the Department of Labor is now proposing to raise the overtime threshold to $35,000 per year. Walsh maintained that he wishes to see all workers fairly compensated, but the fact remains that for small FBOs, having to give even more employees overtime pay could pose a significant burden.
Taxes and Public Justice
A public justice framework is a political philosophy focused on determining and upholding the right roles and responsibilities of different elements of society. In a public justice framework, government, the mediating institutions of civil society, families and individuals all have distinct, essential parts to play in advancing the common good, the well-being of all citizens.
As laid out in the Center for Public Justice’s (CPJ’s) Guidelines on Government, the state has the obvious responsibility of restraining evil, but it also has an affirmative task to facilitate human flourishing. One of the best ways it can do this is to simply establish public policies and regulations—such as taxes—that support private institutions in their charitable endeavors. According to CPJ, this can prove highly effective because private charities “are close to the needs [of those they serve] and devoted to alleviating them.” This is especially true of FBOs, which research has shown depend less on government funds than their secular counterparts, are better able to acquire and retain volunteers, are committed to their causes on a spiritual level and are more trusted by those that they serve.
It is unfortunate, then, that the 2017 Tax Act seems to be burdening FBOs and other nonprofits. Instead of facilitating the work of charities like it is supposed to, the government has actually disincentivized charitable donations and established potentially harmful regulations. These negative effects constitute a divergence from public justice, even if they are unintentional.
According to the Faith & Giving Coalition, the Tax Cuts and Jobs Act, by reducing incentives to give to charity and placing undue burdens on nonprofits, has created significant problems for the sacred sector. The mediating institutions of civil society provide some of the country’s most vital social services, and for the common good of all society, their work should be encouraged. In a public justice framework, it is the government’s duty to uphold and support charities. It remains to be seen what the long-term consequences of the 2017 Tax Act will be, but for now it appears the government has failed in that duty.
The good news is that laws and regulations are always in flux, and with new bills being introduced and brought to the Congress floor, now is a prime time for reform. Hopefully, Republicans and Democrats can work together and seize this opportunity to create better economic conditions for FBOs.
Collin Slowey is an intern with the Center for Public Justice and a political science student at Baylor University.