Capping charitable deductions could cost Maine’s nonprofit sector $20M

PORTLAND, Maine — Maine’s nonprofit sector could experience a $20 million decline in charitable gifts if lawmakers in Washington, D.C., go ahead with a proposal on the table that would cap charitable tax deductions.

That figure is based on national estimates made by the Indiana University Center on Philanthropy on the effect a cap would have on giving and adapted to Maine, where residents who itemize their taxes give approximately $433 million a year to nonprofits and charities, according to Brenda Peluso, director of public policy at the Maine Association of Nonprofits. Though Maine, when compared to the rest of the country, ranks 50th for percent of income given to charity, at 2.8 percent, according to data compiled by the Chronicle of Philanthropy.

That estimated drop in giving would have a profound effect on Maine’s nonprofit sector, which employs one in seven Mainers and contributes $8.2 billion to the state’s economy, during a time of already tight budgets, Peluso said.

“If there are some organizations hanging on by a thread right now and they see a 10 percent decline in their revenue line, yeah, it could close their door, it could be that straw,” Peluso said. “For a lot of others, they’ll cut services, serve fewer people, preserve a bit less property.”

She continued: “The bottom line is now is not a good time to be discouraging support of the nonprofit sector, especially in this time when the government is really leaning on nonprofits to do more. We keep hearing a lot about how philanthropy will help fill the void, but it can’t. The amount of philanthropic giving in Maine is tenths of a percent of what the funding for the sector all adds up to.”

As part of discussions in Washington to avert the fiscal cliff, President Barack Obama and House Speaker John Boehner seem to agree on reducing the amount of deductions taxpayers receive for their charitable giving as a way to increase federal revenue. As it stands now, the charitable tax deduction would cost the federal government about $230 billion between 2010 and 2014, according to the Joint Committee on Taxation.

The current proposal on the table, one which Obama unsuccessfully floated during his first term, would reduce the charitable tax deduction individuals in the highest tax bracket would receive from 35 to 28 percent, saving the government an estimated $3.8 billion in 2012 and $20.3 billion in 2013, according to the Congressional Budget Office. A 28 percent cap would mean that if a high-income individual gave $100,000 to a charity, their tax bill would be reduced by $28,000 instead of by $35,000 with a 35 percent cap.

In Maine, high-income individuals, defined as those with incomes of more than $200,000, made up 36 percent of that $433 million, according to Peluso.

In reality, the effect such a cap would have on philanthropic giving in Maine is difficult to nail down. On one hand, most people who give to charities do so not solely for the tax breaks, according to Peluso. On the other hand, the tax breaks do affect how much a wealthy individual can contribute as a cap on deductions essentially means the cost of donating increases.

“As a donor, I have to say it would impact my giving,” said one philanthropist in Portland who often gives six-figure gifts to Maine nonprofits, but wished to remain anonymous, as many of her gifts are. “We think of ourselves as altruists — and we might still and would still give to programs we care about — but that tax deduction does really help us be much more generous.”

The anonymous donor, who has served on the boards of several prominent Maine nonprofits, said the cap will hurt the nonprofit sector because of the “double whammy” of reduced support from the belt-tightening government and reduced fundraising capabilities.

“If [nonprofits] are hit with an increase in expenses because they have to take more of the social burden and a decrease in revenue because people can’t take the charitable deduction, it will really hurt the nonprofit world in Maine and nationally,” she said. “I think it’s a very important issue, one I don’t think is getting the press generally that it does deserve.”

Meredith Jones, CEO of the Maine Community Foundation, had lunch recently with a donor who also said a reduced cap on charitable deductions would affect their philanthropy.

“So if one can more generalize that one donor to other donors, I think one might have some reason to at least raise the question of what would the impacts be on the nonprofit community,” Jones said.

Despite the amount the federal government claims it will raise in revenue by capping charitable deductions, Jeff Mills, president and CEO of University of Maine Foundation, said the decision will have unintended consequences that would actually increase the government’s burden.

Take financial aid for students, he said. A “tremendous amount” of the nearly $10 million in gifts the UMaine Foundation receives annually goes toward scholarships and financial aid, Mills said. A decline in those gifts would mean a decline in available financial aid to students, which would mean an increase in the number of students seeking government-backed student loans.

“So, in other words, it may consequently cause the government to pay more anyway,” Mills said.

Mills said UMaine is facing a triple whammy because it’s additionally hampered by its commitment to not raise tuition. So the reduction in state and federal funding and the inability to raise revenue from higher tuition, means private fundraising has become increasingly important for UMaine over the last decade, Mills said. Among the charitable groups that support the University of Maine campus in Orono, which includes the UMaine Foundation and Pulp & Paper Foundation, fundraising has doubled in 10 years, from about $10 million to close to $20 million, Mills said.

“Anything we can continue to do to encourage others to give so those least able to afford to go to college have a better chance at doing so is very important,” he said.

A silver lining, however, the UMaine Foundation is experiencing this year is that people seem to be giving more because they’re afraid they won’t be able to benefit from the tax deductions if they delay their charitable gifts, Mills said.

“It’s an interesting time period,” Mills said. “The thing you probably hear over and over again from people is there’s uncertainty and a lot of people don’t like uncertainty when they’re trying to do their financial planning.”

However, not everyone is concerned that a cap on deductions will have dire consequences.

“I’m not worried,” said Lynn Boulger, dean of development at the College of the Atlantic in Bar Harbor, which receives between $7 million and $8 million a year in gifts. “I think people who give are profoundly more interested in how it makes them happy. It’s a gift, it’s not what they get back from it at the end of year from the IRS. They’re proud of the contribution they make.”

Boulger thinks the correlation between altruism and the tax code is weaker than some people think.

“People aren’t out having babies because they get a $3,000 tax deduction. People don’t move to one state over another because it has lower taxes, and we don’t choose this car over that car because of the excise tax,” she said. “We’re not motivated that much by the tax burden.”

As the negotiations continue in Washington, Maine’s nonprofits and charitable organizations are taking a wait-and-see approach. If lawmakers cut expenses and raise revenue to avoid the fiscal cliff, the decision will need to be made before Jan. 1, when the $500 billion in tax increases and $200 billion in spending cuts are scheduled to take effect.