As we approach the end of another year, charitable giving climbs the priority list for millions of Americans whether out of altruism, tax considerations or any of the host of reasons people give. Now is not only a good time to reflect on the generosity of our nation, but also to consider the significant and pressing federal legislative threats to how Americans freely express their generosity. If certain federal proposals picking up steam in Washington pass, giving may look very different at the end of next year.
Americans gave away a record-high of $471.44 billion to charity in 2020. That’s more than $1.29 billion per day. America claims the title of the world’s most generous nation because our people are so generous. The stock market’s strong performance helped drive foundation giving higher and giving by individuals accounted for the bulk of charitable gifts (78% if including bequests). Buoyed by strong personal financial situations following the federal stimulus and a strong economic rebound, households willingly and largely gave to racial justice efforts and to address the unprecedented economic needs triggered by the COVID-19 pandemic.
With a banner year for demonstrative generosity, why would Congress want to change the rules for charitable giving? It’s important to spell out how the proposed reforms, even if well-intentioned, would weaken private philanthropy by restricting how, when and where people give to charity and sabotage the diversity that makes the charitable sector unique.
Senators Angus King (I-Maine) and Charles Grassley (R-Iowa) introduced the Accelerating Charitable Efforts (ACE) Act (S. 1981) this year, which proposes new regulations on private foundations and donor-advised funds (DAFs) with the intention of speeding up gifts to charities, but the bill will suppress giving instead.
DAFs are charitable giving accounts — oftentimes hosted by national sponsoring charities or community foundations — that allow donors at all levels to give strategically, whether that means right now or allowing it to grow over time in order to make a larger gift in the future. DAFs are simple to maintain, flexible, cost-effective and not time-bound, allowing donors to make an impact over time but receive a tax benefit right away.
The ACE Act removes critical incentives that make DAFs broadly appealing, especially among middle-class households. It sets time limits on the life of a DAF, imposes a payout requirement such as 15 years and delays the charitable tax benefit until the funds are distributed. Severe punishments for not disbursing funds and increased administrative costs would decelerate giving to the detriment of the charities and people they benefit. The ACE Act also restricts how private foundations can employ DAFs to further their charitable missions and increases reporting requirements that may chill giving.
National data indicate DAFs are already paying out funds at a fast pace of somewhere between 14.7% and 22.4%, which is faster than the required 5% payout rate for foundations. This begs the question: What problem is the ACE Act attempting to address?
Also, the House of Representatives recently advanced a new 5% surtax on people with incomes above $10 million (which rises to 8% for those with incomes above $25 million) to fund President Biden’s $1.75 trillion social spending plan. Redistribution of wealth through tax proposals like this — and other ideas that have been floated such as a new billionaires tax — can have the unintended consequence of backfiring on private charity.
These proposals are built on the misguided assumption that the government should decide how much of one’s income and assets one gets to keep. Wealthy Americans give the most in absolute dollars to charity, even as lower-income Americans give greater proportions of their incomes. By shifting more wealth out of the hands of individuals and to the federal government, fewer dollars are available for private giving and government has more control of where resources go. There is no guarantee that any new revenue flowing into federal coffers will flow back out to charities, which perform better at meeting local needs than government does. Philanthropy is nimble, innovative, individualized, flexible and pluralistic because it is independent.
The Build Back Better Act also aims to expand the social safety net from cradle to grave by expanding government control. Empirical evidence supports the idea of a crowding effect hurting philanthropy, whereby increased government spending leads to reductions in private gifts, even if it’s not a perfect dollar-for-dollar loss. Nearly $2 trillion in government spending on early childcare and pre-K, housing, workforce development, climate-change initiatives and other civic projects will crowd out private revenue and gifts. In childcare, for example, private religious schools may be forced to close if they cannot compete with government-subsidized options.
Even if nonprofit organizations qualify for public dollars, they might find unsavory strings attached such as enacting controversial policies, complying with mandates and increasing administrative costs.
Americans uniquely responded to the challenges of 2020 by beefing up their support for local and national organizations that address hunger and meet basic needs as well as building up communities and promoting civil rights. Proposed legislative changes may undermine the spirit of giving in America, starve the sector of resources and cede more control over the nonprofit sector to the government. A hollowed out philanthropic sector is a future no one wants.