2017 will be remembered for many events at colleges, universities, hospitals, and medical centers as each has celebrated highpoints and dealt with some disappointments. Overall, when the final numbers are tallied, it will be a good year for philanthropy. As we reflect, we see 2017 shaped by three big events that will impact your development strategies for 2018.
1. The growth of multi-million-dollar gifts continued.
The stock market rose dramatically in 2017. The Dow Jones Industrial Average began the year under 20,000 and ended at almost 25,000. The increases across the market have created great wealth. A decade after the great recession, global wealth has grown almost 30% and approaches $300 trillion. The rise in the stock market also triggered the rise in eight- and nine-figure gifts. There were a record number of $5 million plus gifts in 2016, and 2017 will exceed that number when the final totals arrive.
What is interesting about 2017 has been the rise in large gifts beyond the most elite institutions in the most prosperous corners of the country. A small liberal arts college in Wisconsin, an educational nonprofit in Ohio, an art museum in Texas, and a rehabilitation center in Illinois all received gifts of greater than $20 million last year. This list grows long and extends to all regions of the United States.
For much of the past decade, the largest gifts have gone disproportionately to the most prestigious institutions and came from donors in California and the northeast. While great places and donors in New York, Los Angeles, and the Bay area continued to be generous, there was a more diverse group of causes and places in 2017.
2. The tax law changed incentives for donors.
On December 22 President Trump signed the tax legislation, the most sweeping change to the U.S. tax code in over 30 years. It certainly impacted some year-end 2017 gifts and will shape giving in important ways in the years ahead. Back in November we believed that the end of 2017 would be a very strong time for charitable giving, but the lateness of legislation being signed into law has muted some of its immediate impact. Nevertheless, we expect that as the final numbers come in, December will close strong as major donors sought to make gifts by December 31 to take advantage of the old tax code.
Raising the estate tax.
The estate tax has now been raised to a $22 million exemption, meaning that very few individuals will have taxable estates. While this is not helpful to planned giving, it is far better than the total repeal originally proposed. Already very few Americans were subject to the estate tax when the exemption was $11 million. However, the existence of the estate tax made lots of individuals with more modest wealth nervous about taxes and wanting to ensure that they created solid estate plans. This interest in their estates helped push many of them into conversations about charitable giving. We expect that trend to continue.
Doubling the personal deduction.
There has been a great deal of conversation about how few Americans will now itemize their tax deductions and, therefore, they will have fewer incentives to stretch their charitable giving. The new tax code will double personal exemptions to $24,000 for couples. We expect that one or two years from now a review will show shrinking donor bases for many institutions.
It is important to remember that while the new legislation eliminates direct incentives for individuals to make more serious charitable gifts, hospitals, colleges, and universities facing stagnant or declining donor bases has been a long-term trend. As you consider your development strategies for 2018, keep in mind the new tax law will make it more difficult to fight against this ongoing decline in donor count.
Charitable contribution deduction.
With the cap on charitable contributions of cash to public charities increasing from 50% of AGI to 60% of AGI, there may be an opportunity to talk with key donors about their giving plans. Very few donors approached the 50% level for giving, so the real impact is likely to be limited; but every opportunity to open a discussion about bigger gifts is always important.
Donations in exchange for athletic event seats.
The law is also bringing an end to the practice of athletic boosters getting a full tax deduction that opened the door to seating rights. The new law will reduce their deductions by the value of the tickets or benefits.
Most of the major athletic conferences have a ticket-sharing revenue formula, but few share gifts. Shifting the process to raise the ticket prices as some of the gift deduction disappears could have a major long-term impact on revenue for intercollegiate sports.
Improved profitability for corporations.
With permanent cuts in the tax rates for corporations, profits should be strong. The cut in tax from 35% to 21% should make a major difference. However, the impact of stronger profits on charitable giving is harder to correlate. Corporate giving has not kept up with profits. While a generation ago corporations contributed slightly more than foundations, today foundation giving is three times the total charitable giving by companies. Of course, the changes in the tax code are full of special circumstances. Law schools, architecture schools, and the accounting departments within business schools will see less benefit to their alumni as these professional services firms will not receive a cut in tax rates. It will be important to reevaluate all your development officer portfolios to adjust for the new economic forces that will benefit some more than others.
Potential for another strong year in equities.
The past two years have seen record levels of eight- and nine-figure gifts to great institutions. Wall Street clearly expects that the stock market will show strong gains in the year ahead as the stimulus of a major tax cut kicks in. If that is true, then work with the largest donors in your portfolios will continue to be important.
3. The tax law changed taxes for some nonprofits.
In addition to the various impacts on incentives to give charitable gifts, the tax law will also impact many nonprofits themselves.
Attention on compensation.
Non-profits will pay an excise tax on compensation over $1 million. Studies suggest that there are more than 100,000 individuals in nonprofits—mostly in universities and healthcare—with million-dollar salaries. The 21% excise tax in the tax code is likely to impact star physicians, coaches, senior hospital administrators, and some university presidents. The tax is also likely to generate press stories about the compensation package that put these key employees well into the top 1% group. While there may be many reasons to justify these compensation packages, it is important to note that polls suggest that most Americans do not believe that anyone in the nonprofit sector should earn a six-figure income; remember the median household income in the United States is just $59,039.
Excise tax on major endowments.
The new tax law will impact approximately 32 private universities with endowments over $500,000 per student. The tax is projected to raise few dollars compared to the projected $1.5 trillion addition to the federal deficit, which was the limit set for the bill. However, it represents the challenge that colleges and universities have been unable to explain to the public and their elected representatives of why tuition rises so rapidly and universities are so wealthy. Of course, endowments can help fund scholarships to make it possible for students from middle class or poorer backgrounds to attend the finest universities in the world. Harvard, for example, does not charge tuition for students from households earning less than $65,000 per year. Nevertheless, the public perception that tuition is out of control and endowments only perpetuate the unaccountable and rich institutions should be a concern to everyone in advancement.
As you look ahead at how tax law and other trends might impact your development strategies for 2018, Bentz Whaley Flessner is able to help at every stage. Contact us today to learn more. Together, we transform philanthropy.