Tuesday, May 22 , 2018, 2:10 am | Fair 53º


A Charitable Deduction Reduction Has Local Nonprofits’ Attention

Obama's proposal to lower tax caps has some seeing danger ahead, while others say the giving will go on regardless.

Joyce McCullough, executive director of Habitat for Humanity of Southern Santa Barbara County, says donors understand that social services are more crucial than ever but notes that
Joyce McCullough, executive director of Habitat for Humanity of Southern Santa Barbara County, says donors understand that social services are more crucial than ever but notes that “everybody’s portfolios have dropped drastically.” (Lara Cooper / Noozhawk photo)

In today’s weakening economy, more people than ever may find themselves depending on the work and outreach of nonprofit organizations. But even as nonprofit resources are being stretched to reach more people with fewer donations, these groups may encounter yet another hurdle. The budget that President Obama has presented to Congress would limit tax deductions on charitable giving.

Under the administration’s proposal, taxpayers earning more than $250,000 will have their ability to deduct charitable contributions reduced to a rate of 28 percent from 35 percent. The White House Office of Management and Budget says the money raised from the limits on itemized deductions would be used as part of a $634 billion reserve fund for health care reform. Administration officials have also sought to reassure charities that the economy will be better by 2011 when the provision would take effect.

But nonprofit organizations are wary, noting the change could be a disincentive to some donors who might further cap their gifts because of the new restriction. Independent Sector, a nonpartisan leadership forum for nearly 600 charities, foundations and corporate giving programs, is one such organization.

“This could be a problem for many struggling nonprofits vital to our communities that are already facing a very difficult fundraising environment,” Independent Sector said in a statement.

And how would this legislation affect nonprofit groups locally?

Santa Barbara Foundation president and CEO Ronald Gallo says he finds the proposed tax deduction reduction troublesome, but
Santa Barbara Foundation president and CEO Ronald Gallo says he finds the proposed tax deduction reduction troublesome, but “these are extraordinary times.”
Ronald Gallo, president and CEO of the Santa Barbara Foundation, described himself as “cautiously optimistic” during this economic downturn. The Santa Barbara Foundation awarded $27 million in grants to various groups last year and operates from a $250 million endowment, making it one of the largest private sources of funding in Santa Barbara County. Many of the foundation’s donors would fall into the income category of $250,000 or more and would be affected by the decrease in the deduction, he said.

“This doesn’t come as welcome news,” he said of the limits, but said he understands the reasoning. “I think to be fair, we are in crisis and the federal government is trying a lot of different things. These are extraordinary times.”

Gallo referenced a 2002-2003 study, which showed charitable giving to be largely unaffected by reducing the tax deduction to 35 percent from 38 percent. But because Obama’s proposal involves a larger decrease, and is coupled with a more dire economic environment, Gallo said he found the decrease particularly troublesome at this time.

But often, he said, tax reasons are at the bottom of the list of donor motivations.

“People do give because of their passions and because they care,” he said.

According to a 2006 Bank of America study, more than half of high net-worth households said their charitable giving would remain the same if they received zero income tax deductions for their donations. Thirty-eight percent said their contributions would somewhat decrease, while only 7 percent said they would dramatically decrease their giving.

Other factors affect giving, not the least of which is the condition of the stock market, according to a study by the Indiana University Center on Philanthropy. Every time the stock market declines by 100 points, giving declines by $1.85 billion, the report said; charitable donations rise by that same amount when the stock market increases.

The center also examined data from 2006, exploring how Obama’s proposal would have affected charitable deductions from the period. Researchers found that, under the Obama plan, Americans with income of $250,000 or more would have decreased their giving by nearly $3.9 billion. Taxpayers at that income level claimed more than $81 billion in charitable contributions that year alone.

“It is a time of great fragility for nonprofits,” Gallo said. “There’s a lot of fear. I don’t think the full brunt of it has hit full force yet, for foundations in particular.”

The Santa Barbara Foundation is working with fewer dollars, in terms of its assets, because much of that endowment is invested. But that hasn’t deterred the amount of grants the foundation is doling out this year. Instead of working off of the same percentage, which would mean fewer dollars than last year, it has pledged to distribute the same amount in 2009.

“We haven’t seen a change so far, but it’s too early to say we won’t be affected,” he said.

Gallo also said that giving in America is very well distributed and that people in lower income categories actually give more, proportional to what they make. And Santa Barbara’s reputation of philanthropy may help its nonprofit groups fare better through the downturn, relative to other communities.

“I have never arrived in a place that is more generous and more philanthropic,” said Gallo, who was hired late last year after a 15-year stint as president and CEO of the Rhode Island Foundation, one of the nation’s largest community foundations.

Joyce McCullough, executive director of Habitat for Humanity of Southern Santa Barbara County, echoed Gallo’s sentiments.

“We’re seeing a little bit of hesitation,” she said. “But the general inclination of those in this community is to help those who are less fortunate.”

McCullough said she thinks every nonprofit organization is seeing donors reconsider their gifts.

“Everybody’s portfolios have dropped drastically,” she noted.

However, she said she feels donors understand that social services are more crucial than ever.

“Those who don’t have access to material wealth are even more scared at this point and need our help and need our services even more,” she said.

The impact she said she’s noticed has been a decrease in the amount of funding and grants that usually comes from foundations and corporations, like banks, meaning nonprofits must work twice as hard to get the same amount of dollars.

Habitat for Humanity relies on donors from across the financial spectrum, not just the upper bracket that would be affected by the Obama proposal. McCullough said she feels Habitat’s donors are motivated by the cause.

“Certainly, the tax incentives are there, and that’s wonderful,” she said, “but I think that people give because they have big hearts.”

Habitat for Humanity is working to raise $3.5 million to continue working to house low-income families on the South Coast, and the campaign began last year, before much of the economic turmoil was in full swing.

“It’s a struggle,” she said. “You set a goal when times are good, and then you set certain time parameters, and it’s an uphill climb to meet those goals.”

Still, McCullough sees opportunity in the adversity.

“We hear so many negative messages,” she said. “I think that the nonprofit community can offer some positive messages even in this climate of helping each other along in life.”

Rep. Lois Capps, D-Santa Barbara, said Congress will be examining the budget containing the deduction decrease in the coming weeks, but she noted that South and Central Coast residents are incredibly generous.

“I don’t think that people give to charities so they can get a tax break,” she said. “They do it because they know it’s the right thing to do.”

The larger issue, Capps said, is getting the economy moving again, and she said a recession and its affects are what truly endanger charitable giving.

“Even so, we always have to be vigilant that changes to the tax code don’t have the inadvertent effect of reducing contributions to nonprofits, especially in such tough economic times when their services are more in need than ever,” she said. Capps said she’d need to be certain that wouldn’t happen before she could give the proposal her support.

One of the area’s largest nonprofit organizations, Santa Barbara Cottage Hospital, just finished a five-year, $110 million campaign to build a new, state-of-the-art hospital. That campaign included late December donations of $3 million from Toni and Stephen Haselton, $1 million from Genevieve and Ivan Reitman, and another $1 million from Oprah Winfrey.

Cottage Health System spokeswoman Janet O’Neill said she felt Cottage’s donors gave for motivations other than the tax break. She and others on staff have heard about the possibility of a decrease in the charitable deduction, she said, but whether those funds will be useful in improving health care “remains yet to be seen.”

Westmont College executive vice president Cliff Lundberg, who oversees development at the private Christian school and is currently fundraising for its campus master plan, said he didn’t know how the deduction reduction might affect Westmont.

“I do know it’s a really bad idea,” he said. “At best, people are feeling a lot of uncertainty right now. At worst, they’re feeling poor.

“History shows that charitable giving doesn’t decline much during economic downturns,” he said. However, he added, “We haven’t seen a downturn like this before so we’re in uncharted waters.”

But faith-based donors tend to step up even in hard times, he noted, and the response of Westmont supporters during the Tea Fire was indicative of that.

“We saw an unsolicited surge of support from all over the country, despite the economy,” he said.

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