CITYWIDE — Wrangling in Washington D.C. over the national budget has left nonprofits in fear that they will suffer a one-two punch between the now-infamous fiscal cliff and proposals to limit the amount of charitable donations that people can deduct from their federal income taxes.
Nonprofit organizations depend on private donations and public funds to keep their doors open, and the situation in Washington is threatening to damage both. Nonprofits also fear that as their funding goes down, the need for their services will go up as more Americans are pushed to the brink of their budgets.
It is what Tim Delaney, president and CEO of the National Council of Nonprofits, calls “bad news.”
“They’re creating new demand for services and taking away the resources needed to provide them,” Delaney said.
The first danger comes from the “fiscal cliff,” the $500 billion in tax increases and $200 billion in spending cuts that are expected to take effect on or around Jan. 1, 2013 unless legislators can come to a budget agreement.
That significant cut to the public sector will fall across the board, resulting in a 7.6 to 9.6 percent cut to all discretionary spending.
The trick is that much of that money goes to nonprofits that contract with government agencies, with federal money that trickles down to the state level and then to local government, Delaney said.
“That’s 8 percent across the board, without rhyme or reason,” he said.
In numbers, that means $54.6 billion out of funding for basic services, including programs that benefit the middle class, seniors and children; cuts money from the Federal Emergency Management Agency and housing programs, according to the National Council on Nonprofits.
The second blow could come from talks that would change the way Americans are allowed to treat charitable deductions.
Congressional Republicans and some Democrats favor a cap on itemized tax deductions. That can include a person’s state taxes and mortgage interest deduction, amongst others.
Those two items alone would eat up the majority of proposed caps, which have been suggested at $15,000, $25,000 and $50,000, leaving little to no room for charitable giving, Delaney said.
“If they cap it around $20,000, there is no incentive for anybody to give any money,” he said.
The National Economic Council, a federal organization that advises the president on economic policy, estimates that a $50,000 cap would reduce charitable giving by about $150 billion over the course of 10 years, while a $25,000 cap would reduce giving by $200 billion.
Even a $25,000 cap that applied only to high-income households would reduce giving by at least $10 billion per year, the council estimates.
According to the Tax Policy Center, a joint project of the Brookings Institution and Urban Institute, 78 percent of households in the top 1 percent of income earners claim more than $50,000 in itemized deductions already.
Instead, the National Economic Council touts President Barack Obama’s stance that would limit the value of all high-income tax benefits to 28 percent. The council estimates that these tax incentives are worth 35 cents on the dollar for the highest income households, but only 28 cents or less for middle-class households.
“Bringing tax incentives for the highest-income households more in line with tax benefits for middle-class families would raise significant revenue for deficit reduction while also making the tax code more fair,” reads a report by the National Economic Council released this month.
Cuts to incentives for charitable giving would be damaging to local nonprofits like the Westside Food Bank and the nearly 70 agencies to which it provides food, said Genevieve Riutort, development director at the food bank.
“We like to think everyone gives from the goodness of their heart, but the tax deduction doesn’t hurt,” Riutort said.
Those smaller nonprofits rely almost entirely on private giving, meaning that the loss to incentives would hurt them the most.
The Westside Food Bank receives more than 50 percent of its income from individuals and congregations, another 33 percent from foundation grants and roughly 12 percent from Santa Monica, Beverly Hills and the Federal Emergency Management Agency.
“We really just hope that the donation deduction does not go away,” Riutort said. “It’s hard to imagine that would happen because it’s so needed.”
With additional government cuts, the burden falls to the private sector to keep nonprofits in the black.
“Disincentivize the private sector and the safety net will be cut even further and we’ll see people descending into poverty in ways that we haven’t seen in the past,” Riutort said.
Local agencies that get by without the big advertising budgets of larger, national organizations could be hurt the worst, Delaney said.
“If there’s a natural disaster or crisis, people will still give to the Red Cross, but they will forget about giving to the local food bank, community theater or Girl Scouts,” he said.