U.S. policies could severely chill charitable giving

“Ironically, the very fact that democracy has such a lengthy history has actually contributed to confusion and disagreement, for ‘democracy’ has meant different things to different people at different times and places.”—Robert Dahl

Pay attention, Mr. Archibald!

During my life, I have relied on Sisters of Mercy, School Sisters of Notre Dame, Irish Christian Brothers, and Basilian Fathers to keep me on the straight and narrow. The admonishment of my teachers has led to a career focused on looking forward. This focus has forced me to anticipate change as a constant.

Based on my educational and professional mentors, I feel compelled to raise an official red flag for 2017, notifying each and every tax-exempt board and management team to pay attention to the changing landscape in our country. In the midst of change, lack of clarity approaching chaos, planning your strategic positioning in a proactive, timely manner is imperative.

The quotation above, from a world-renowned political scientist and professor at Yale, also struck me as particularly apropos to the topic of this column. The country is in the process of what may be a 100-day paradigm shift in government that could strongly affect private foundation and individual funding for tax-exempt organizations. The United States has been, for decades, the most generous nation on Earth with respect to corporate and individual giving to nonprofits. Our Medicare, Medicaid, and Social Security programs are, as entitlement programs, growing at a pace that far exceeds federal, state and local governments’ ability to sustain them.

Keep in mind that we have an aging population, with approximately 10,000 baby boomers retiring every day for the next 15 years. As a group, people over the age of 65 consume three times the amount of health care services compared to the population under 65.

If I haven’t grabbed your attention so far, consider the following proposals that have been, and will be, discussed in the next 100 days of the Trump administration and the new Congress.

Tax policies

• Eliminate the estate tax: This change, if enacted, will result in a reduced incentive for wealthy taxpayers to leave legacies and bequests in their estate planning process.
• Establishing an arbitrary limit on charitable contribution deductions: President Trump’s tax proposal provides for a cap on individual charitable contribution deductions of $100,000 for individuals and $200,000 per couple. If enacted, this will significantly decrease the incentive for individual charitable contributions. With charitable contributions in the U.S. exceeding $300 billion every year, this one change, along with elimination of the estate tax, may have a nuclear effect on literally thousands of tax-exempt charitable service providers.
• Income tax reductions: The pro-growth tax policy of providing corporate and individual tax rate reductions, immediate expensing of capital purchases and elimination of the alternative minimum tax, among many others, will undoubtedly put more cash in Americans’ pockets. Unfortunately, the federal budget depends heavily on corporate and individual income tax payments. The question of how the reduction in federal tax revenue will impact government expenditures is still unclear. However, one must remember that spending for Medicare, Medicaid and Social Security represents approximately 74 percent of total federal expenditures.

Entitlement policies

• Repeal and replace Obamacare, also known as the Affordable Care Act: More than 20 million people are covered by the ACA, which admittedly has a number of flaws that need to be corrected. Repeal and replace will result in higher bad debts, negative cash flow and increased financial stress on all health and human service providers and ACA enrollees.
• Transfer of Medicaid responsibility to states: This is commonly referred to as “block granting Medicaid.” With New York the No. 1 state in per capita Medicaid spending for more than 6 million New Yorkers, this will undoubtedly shift a significant amount of financial risk to the state budget in order to control the current $60 billion program. It is unfortunate that the New York State Medicaid population is also aging, requiring more healthcare services, while the state budget has a self-imposed 2 percent spending cap.
• Elimination of funding for Planned Parenthood: More than 4.5 million individuals rely on Planned Parenthood for their healthcare, which includes far more than reproductive services. There are 68 Planned Parenthood affiliates throughout the United States (covering all 50 states and the District of Columbia).

All of the above provide potentially significant challenges to the future fiscal viability and stability of tax-exempt charitable organizations. The breadth of the impact across multiple charitable service sectors beyond health and human services may result in a staggering blow to cash flow, the life blood of fiscal viability and stability for nonprofits.

In my 40 years of philanthropic and professional involvement with tax-exempt charitable organizations, 2017 appears to present the most significant challenges to the economic and service infrastructure of tax-exempt charitable organizations across the country.

I do believe that change is good. Addressing the challenges and opportunities resulting from change is what differentiates success from failure for your organization.

Gerald Archibald is a partner serving both of our Rochester, NY, and New York City offices.

This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.