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Fiscal Cliff Notes for Philanthropy Professionals

December 6, 2012

The fiscal cliff (sometimes referred to as the fiscal slope, fiscal curb, fiscal speed bump, etc.) is fast approaching.  With so many others having exercised their right to create a personal moniker for the upcoming national financial event, I have decided to call it the fiscal tsunami, given that the event will come in waves that could pack quite a wallop.  Whatever your preference in names and metaphors, the stakes are serious for our country, and will impact philanthropy.  Decisions made (or not made) in the remaining days of 2012 and early 2013 will impact the United States for years to come.

What is the fiscal cliff (or tsunami)?
Pundits continue to use the term, but little time has been taken to define the term.  There are essentially three major waves of fiscal policies that will affect the nation deeply if President Obama and Congress do not come to an agreement by the end of this year, or very early in 2013.

Recently, there has been a great deal of emphasis on the Bush tax cuts expiring, but that is certainly not the only issue to be addressed.  Here’s a quick list:

  1. From Bush Back to Clinton…If no agreement is reached, there are a series of Bush tax cuts that will expire.  The marginal rate or tax bracket for every American will return to the rates in place during the Clinton Administration.  Tax rates and exemptions regarding capital gains and dividends, estates, and gifts would increase and decrease, respectively.  Additionally, the Bush-era tax credits would be reduced significantly.  For instance, the child tax credit would decline by 50%, the dependent-care tax credit by 20%, and the earned income tax credit would be adversely impacted as well.
  2. Obama-era Tax Cuts & Credits End, Too…President Obama and Congress enacted a payroll tax holiday, which reduced employees’ payroll rate from 6.2% to 4.2%; that would expire.  So would the American Opportunity tax credit, which helps families pay for college, extended unemployment assistance for long-term unemployed, and other enhancements of the earned income and child tax credits.  Equally importantly, fixes addressing the alternative minimum tax and “marriage penalty” would sunset.
  3. Spending Cuts, Budget Caps & Sequestration…President Obama and Congress agreed to a deal last year that would reduce federal spending by $1.2 trillion over the next 10 years.  As part of that deal, there will be across-the-board cuts in nearly every area of federal discretionary spending.  Additionally, the legislation set annual budget caps limiting the amount the federal government can spend in a given year.

The list above is essentially what we are talking about when discussing the fiscal cliff, tsunami, or white water rapids….Left alone, the combination of these changes in fiscal policies would result in up to $500 billion in tax increases and $200 billion in spending cuts around the beginning of 2013.

Why should you care? 

It is estimated that about 70% of all charitable giving nationally is contributed by individuals.  Without a deal, every American taxpayer will pay more in taxes, leaving less to donate to charitable organizations like yours. While we are all in awe of the relatively rare multi-million-dollar gift from a given wealthy individual, the middle class tends to give more than the nation’s rich proportionately.  So, abrupt increases in the tax burden for middle-class taxpayers could have real-world implications for nonprofits.

Combined campaigns—and the nonprofits they benefit—could feel the impact early on as the middle class is squeezed by tax credits phasing out at the same time payroll tax rates are increasing by approximately 50%.  Many combined campaigns are based largely on regular payroll deductions.  In these uncertain and potentially more highly taxed times, the capacity of middle-class donors to give a portion of every payroll check at, or higher than 2011 levels, may be sorely tested.

In the next installment, we will take a look at some of the fiscal cliff fixes being considered and what they may mean for philanthropy.

William Martin, Jericho Resources, Inc.
Board Director, AFP-Southeastern Wisconsin Chapter

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