The Tax Bill’s Poison Pill
By now, pretty much everyone is aware of the massive tax bill that is expected to be voted into law this week by Congress. If you are a hedge fund manager, you are pretty happy right now. If you are a nonprofit CEO or CDO, well… not so much.
The proposed House bill, pitched as the “Cut Cut Cut Act” by President Trump, but officially named the Tax Cuts and Jobs Act, includes a provision that would nearly double the standard deduction to $12,200 for an individual and $24,400 for a married couple.
Raising the standard deduction would reduce the number of taxpayers who itemize deductions—including charitable donations—from the current 30 percent to 5 percent, experts say.
An excellent analysis of the impact of virtually eliminating the deduction for charitable giving was published recently by Dr. Patrick Rooney, a professor of economics and philanthropic studies at Indiana University’s Lilly Family School of Philanthropy. Rooney estimates that the new tax bill will result in a 4.6 percent decline in household donations to nonprofits, more than $13 billion when compared to what American households gave in 2016. We are concerned that it may be even worse. Here’s why.
Like most things explained by behavioral economics, people are not rational actors with regards to charitable giving. Although people engage in many altruistic behaviors, the language they use in explaining their actions most often emphasizes their own self-interest. When talking about why they volunteer, they tend to say things like, “It gave me something to do,” “I liked the other volunteers” or “it got me out of the house.”
In his book, “Acts of Compassion,” Princeton sociologist Robert Wuthnow describes the difficulty people have acknowledging that they are motivated by genuine compassion or the desire to help others. People Wuthow interviewed went out of their way to stress that they were not “bleeding hearts, goody two-shoes, or do-gooders.”
Research has consistently shown that the expectation of receiving a tax benefit is a significant factor in motivating people to make charitable donations. On the face of it, that seems irrational. If someone is donating $1,000 expecting to get a $300 tax savings, why wouldn’t they just give $700? Clearly, something else is at play.
Receiving a tax deduction for charitable donations provides people with what psychologists call an exchange fiction. The deduction allows them to attribute their altruistic acts to a more self-interested reason for acting compassionately. When people get a tax deduction in exchange for a donation, they don’t have to feel like a do-gooder. They can explain their behavior as something they can feel good about, but not as something that implies that they have a responsibility to support other causes, or even the same cause they just donated to in the future.
The offer of an exchange creates a fiction that allows people to act on their altruistic impulses without a psychological commitment to do more. It gives them an excuse for donating. It allows people to feel good about “doing their part” without committing themselves to an open-ended relationship with the organization that they might not want to continue in the future.
That is why nonprofit CEOs and CDOs should be very, very concerned about the reduction in the number of people who take advantage of the charitable tax deduction. The deduction isn’t really about bottom-line savings. It is the psychological value of the deduction, not the actual dollars saved, that makes tax-deductible donations so attractive to people.
So, nonprofits should expect to take a significant hit in revenue next year because of the tax bill. One way to stem the bleeding may be to increase their investment in peer-to-peer fundraising. According to DonorDrive, peer-to-peer is now the fastest-growing space in both giving and fundraising. In addition to the reliable walks and runs, DIY fundraising is rapidly expanding; the number of organizations adding DIY campaigns to their fundraising in DonorDrive grew by 125 percent over the past two years.
Here’s why emphasizing peer-to-peer is smart. Dutch scholars recently conducted a meta-analysis of 500 studies to identify the key factors that drive donating. They concluded that for more than 85 percent of charitable donations, people gave because someone asked them to. Peer-to-peer leverages social relationships. When you are solicited for a donation by a peer—a friend or family member—pretty much nobody asks for a receipt, so they can write it off on next year’s tax return.
Will upping your peer-to-peer game offset the consequences of the Republican tax plan? No. But doing so will position you to better weather the storm. The good news? The next election is less than a year away.
Katrina VanHuss and Otis Fulton have written a new book, Dollar Dash, on the psychology of peer-to-peer fundraising. Click here to download the first chapter, courtesy of NonProfit PRO!
Otis spent most of his career in the education industry, working at the psychometric research and development firm MetaMetrics Inc., Pearson Education and others. Since 2013, he has focused on the nonprofit sector, applying psychology to fundraising and donor behavior at Turnkey. He is the co-author of the 2017 book, ”Dollar Dash: The Behavioral Economics of Peer-to-Peer Fundraising” and is a frequent speaker at national nonprofit conferences. With Katrina VanHuss, he co-authors a blog at NonProfit PRO, “Peeling the Onion,” on the intersection of psychology and philanthropy.
Otis is a much-sought-after copywriter for nonprofit fundraising messages. He has written campaigns for UNICEF, St. Jude’s Children’s Research Hospital, March of Dimes, Susan G. Komen, the USO and dozens of other organizations. He has a Ph.D. in social psychology from Virginia Commonwealth University and a Bachelor of Arts from the University of Virginia, where he also played on UVA’s first ACC champion basketball team.
Katrina VanHuss has helped national nonprofits raise funds and friends since 1989 when she founded Turnkey. Her client’s successes and her dedication to research have made her a sought-after speaker, presenting at national conferences for Blackbaud, Peer to Peer Professional Forum, Nonprofit PRO, The Need Help Foundation and her clients’ national meetings. The firm’s work is underpinned by the study and application of behavioral economics and social psychology. Turnkey provides project engagements, coaching, counsel and staffing to nonprofits seeking to improve revenue or create new revenue. Her work extends into organizational alignment efforts and executive coaching.
Katrina also regularly shares her wit and business experiences on her and Otis Fulton's NonProfit PRO blog “Peeling the Onion.” When not writing or researching, Katrina likes to make things — furniture from reclaimed wood, new gardens, food with no recipe. Katrina’s favorite Saturday is spent cleaning out the garage, mowing the grass, making something new, all while listening to loud music by now-deceased black women, throwing in a few sets on the weight bench off and on, then collapsing on the couch with her husband Otis to gang-watch new Netflix series whilst drinking sauvignon blanc.
Katrina grew up on a Virginia beef cattle and tobacco farm with her three brothers. She is accordingly skilled in hand to hand combat and witty repartee — skills gained at the expense of her brothers. Katrina’s claim to fame is having made it to the “American Gladiator” Richmond competition as a finalist in her late 20s, progressing in the competition until a strangely large blonde woman knocked her off a pedestal with an oversized pain-inducing Q-tip. Katrina’s mantra for life is “Be nice. Do good. Embrace embarrassment.” Clearly she’s got No. 3 down.