Observers have long noted the charitable impulse of the American people—their determination to come together, roll up their sleeves, and get to work when confronted by problems. In the aftermath of the September 11 terrorist attacks, we’ve seen that characteristic displayed again and again in the flurry of blood donors, the long lines of patient, determined volunteers, and the efforts large and small in every community to raise funds with bake sales, car washes, benefits, penny drives, and even lemonade stands. Most obviously, we see it in the more than $1 billion so far reported in individual, corporate, and foundation gifts to funds that are responding to the disaster.
But there is growing cause for anxiety, too—and not just in how that money will be allocated, which itself will be the subject of much scrutiny. The more compelling issue as we finish out this year and go into the next is: What will the effect be on charitable giving overall, particularly for charitable endeavors unrelated to the events of September 11?
The collapse of the twin towers has changed the lives of tens of thousands directly, as they begin to adjust to life without a loved one. Now many hundreds of thousands more are being hurt indirectly, through a spiraling market and economic uncertainty. A recession that was only just beginning has deepened and taken hold; the markets have taken a dive, with the Dow down 11 percent as of this writing, the S&P off 15 percent year to date, and the Nasdaq down 26 percent. Nor is it just the U.S. markets: international equities are off about 24 percent year to date.
The stunningly generous amounts given in the first few months to assist the victims already roughly equal a quarter of the total amount raised by relief and other international groups in all of last year, according to the Chronicle of Philanthropy. Still, even with the total given to victims of September 11 topping $1 billion, that’s only about one-half of 1 percent of the over $200 billion total given to charity in 2000. That seems only a slight diversion of charitable funds. Why, then, should we worry that the ripple effects of the terrorist attack will also affect the nonprofit community?
The reasons for concern are twofold: the economic downturn and psychology. First, an analysis of giving over the past 60 years done by the American Association of Fund Raising Counsel (AAFRC) shows that while giving tends to hold constant or increase with political or military crises, the one time it declined was in 1987, when there was a sharp and obvious drop in financial markets.
While the study doesn’t presume to address all the other variables that might affect giving, it is fair to assume that if the recession and significant market losses continue, charitable giving will decline. Corporations, which accounted for approximately 5 percent of total giving last year, will feel less confident about spending money on non-business activities. Foundations, which provided 12 percent of charitable contributions in 2000, will be looking at their shrunken endowments and commensurately lower mandatory payouts. For many foundation managers, in fact, this may be the first time in their tenures that their foundations’ assets have declined in any substantial way. If the recession goes deep enough, individuals—who accounted for 75 percent of giving in 2000—may, despite their immediate generosity in the wake of the terrorist attacks, cut back their giving as well.
An even greater concern is harder to quantify but already manifest in endless anecdotes: People want to give, but they want their giving to be relevant to the events of September 11. Many have made substantial contributions already and see those gifts as a reallocation of their usual contributions, rather than as a supplement. To others, the world has changed, and these shocking events are all that seem important. Fund raisers for worthy charities are being told “not now,” or that the giver’s focus has been reordered by new priorities.
Yet it is important to remember that just as an economic depression and the crippling of capitalism would be a victory for the terrorists, so too any decline in our charitable giving and the crippling of numerous “off-topic” charities would be taken as a sign that the terrorists have diminished our best selves.
A Way Out
President Bush and Congress can do much to encourage a vibrant nonprofit community, even in the face of a recession and a national focus that seems to trump all other concerns.
Itemization and IRAs. President Bush had previously made several proposals for a more giving-friendly tax code that were dropped as part of the original tax package compromise but have since been reintroduced and passed by the House of Representatives. Unfortunately, as I write, they languish in the Senate. These proposals should be made to have effect immediately; we should allow non-itemizing taxpayers to deduct their charitable contributions, and we should permit tax-free rollovers from IRAs to charity. Next year, if contribution levels remain a concern, we should explore the idea of a tax credit to encourage individual charitable contributions.
Charitable Deductions. Some time ago, the Bush administration also proposed increasing the limit on corporate charitable deductions from 10 percent to 15 percent of taxable income. The version of that passed in H.R. 7 takes until 2010 to phase in the full amount—too long under present circumstances. The Senate should make those changes effective immediately and then act expeditiously to pass the legislation.
Excise Taxes. Foundations and charitable trusts pay an annual federal excise tax on interest, dividends, and capital gains, which was designed to cover the costs of the IRS’s oversight of philanthropy and then redesigned to create an incentive for foundations to give away slightly more each year than previously. (If they don’t, their tax doubles from 1 percent to 2 percent.) In practice, the IRS takes more than its oversight expenses, while the tax itself often has the perverse effect, in years where foundations can take substantial losses, of causing them to slam on the giving brakes, pay fewer taxes than usual, and lower their average payout going forward in order to control their average payout and hence their tax rate. Most unfortunately, the excise tax comes directly from funds that would otherwise go to grantees, and it also causes foundations to make decisions based on tax policy, not charitable need. The House version of the tax package calls for reducing the excise tax to a flat 1 percent, which would be a step in the right direction of eliminating it altogether.
Qualifying Distributions. Grant making organizations generally have as their target for total outlays (giving plus administrative expenses) the “qualifying distribution” mandated as a minimum payout by the IRS—roughly 5 percent of their average assets. The structure of foundations, with their long or even perpetual lives, places a premium on asset growth for the future over current charitable distributions.
As a consequence, one of the most valuable things President Bush could do is ask grant making 501(c)(3) entities, as their patriotic obligation, to use their discretion to increase their charitable contributions over last year. While circumstances may eventually cause the country to consider raising the qualifying minimum distribution, we should first allow grant makers to voluntarily rise to the challenge before them.
A National Voice. It would be a tremendous help, too, for the president to remind us that in addition to direct relief many other causes could use financial support from those who want to fight the repercussions of terrorism: job training, microlending, scholarships to private and parochial schools, and international relief for refugees, to name only a few.
Above all, however, President Bush should remind the nation that those problems we faced before the attacks face us still, and that even charitable endeavors unrelated to the events of September 11 are no less valuable now. We have too much invested, and too much at stake, to let down worthy organizations.
We are a generous nation. Let us rise to the challenge and in so doing show the terrorists how a truly moral people behaves.
Heather Richardson Higgins is a director of the Randolph Foundation. She serves on the board of The Philanthropy Roundtable and a variery of charitable organizations.