Betty, a “middle class” wife, working mother of three teenagers, an all-around “mensch,” is a charitable individual, donating about $3,000 annually to nonprofits she likes. Is she really giving $3,000 total dollars, though? She is not. At her family’s combined income level, she is in the 33 percent tax bracket, and paying this $3,000 to charitable organizations allows her to avoid paying about $1,000 in federal taxes. In the most simplified terms, her $3,000 donation only costs her $2,000, a real bargain.
Would Betty donate $3,000 annually if there were no tax benefit? If nonprofits are concerned the answer is a resounding NO, then they should reevaluate their value proposition on the heels of the new tax reform laws in 2018.
The federal government skews behavior by subsidizing certain activities while taxing others. In the nonprofit world, much of the federal government-subsidized largesse might fall by the wayside with the sweeping tax reform recently passed by the House and Senate, which has many established nonprofits in a tizzy. And, they are right to be concerned…welcome to the big, bad world of the free market.
The term “not-for-profit” is as anti-free market a slogan as exists. The free market rewards successful organizations with money, or profit, for fulfilling a need in the marketplace. “Nonprofits” exist on the desire of some group of interested supporters to perpetuate the mission of the organization. Once the new tax laws take effect, a segment of the taxpaying public will no longer receive a direct subsidy for making charitable donations because a higher standard deduction wipes away the tax benefits of itemizing philanthropic donations.
How should nonprofits react to this new and partially unsubsidized reality?
Keep Calm and Embrace Capitalism!
The days of nonprofits reaching out with December appeals, attempting to attract donations from the middle class with the promise of year-end tax benefits, may now be in the past.
Of course, very high-income donors will continue to receive tax benefits from their philanthropic contributions. What about all the Bettys and their $3,000 annual donations?
The most rational charitable organizations will find a way to use this new tax situation to their benefit. When confronted with the stark reality of the federal government potentially restricting the tap of funds to nonprofits, these organizations should look to the private “for profit” sector and see that now they must compete for the hearts, minds and dollars of potential supporters.
Before the not-for-profit world decides to see nothing but doom and gloom with this new tax reform reality, consider the glass half full: Most Americans will see larger disposable after-tax income in their wallets, potentially allowing for even larger donations.
To survive and thrive, nonprofits must go back to basics and — like for-profit organizations — really understand who their market is (donors), why the market uses their products (support the cause), and what would make them “buy” more (increase donations).
A well-run nonprofit working on a goal or cause that society in general values — and that supporters with disposable income in particular, believes important — should make sure its message is clear, its progress demonstrated, its mission understandable and reachable.
- Show a return on investment, proving to its donors how and where their money is being spent and why it is important to continue funding its cause.
- Appeal with targeted marketing to those directly affected by the issue they are working to solve.
- Establish its ability to run lean and efficiently, applying the majority of its funds to the actual issue.
- Offer a “value proposition,” providing noncash rewards to donors in unique ways to make them feel good about donating to that cause even without tax benefit.
Once free market forces have their way in the nonprofit world, the weaker organizations and ones unable to regroup under this new paradigm will fold or be absorbed into other nonprofits, and competition will be reduced, leading to fewer hands out for donation dollars. This will give the remaining well-run organizations a leg up on fundraising, especially if their message is on-point.
Additional good news: With more people taking home more money, some taxpayers will be able to work less and volunteer more, also improving the nonprofit sector. Or people will spend more money, improving the economy, spurring growth and more hiring, leading to fewer societal issues relating to the unemployed, possibly diminishing or eliminating the need for nonprofits working in those areas.
One basic tenet of economics in a free society is that “people vote with their feet and pocketbooks.” Putting nonprofits in the position to contend with more free market forces will show what society issues truly values, not what government intervention skews society to support.
Back to Betty: How can the nonprofits Betty has supported in the past still get her to donate $3,000 annually, or, even more? If I ran one of the charities Betty has donated to, I’d reach out early in the year, preparing a report or brochure or poster showing all my organization had accomplished in the past year, highlighting what our projects will be for the upcoming year, how each dollar of donation is spent, and what the benefit is to the donor contributing to my organization. I’d thank Betty for her generosity in the past, and let her know of why specifically she should continue to support us. I’d give her options for payments, possible volunteering opportunities, upcoming events for participation and even chances to meet the beneficiaries of her donations.
These charities need to take a page out of the for-profits’ playbook, and start earning their money. For nonprofits, it will be a battle of the fittest, and the ones who embrace this new normal and learn how to use it to their favor will flourish, despite all the doom and gloom predicted.
Paula Fargo is a rational business owner in Baltimore City. She can be reached at [email protected]
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of The Daily Caller.