Chairman’s Corner: November 2003

Preserving the Flow of Capital to Charitable Organizations

by Mario Morino, Co-founder of VPP

Recently an online newsletter targeted to donors and nonprofits asked me to share my thoughts on the repeal of the estate tax. As you will see in the following article, I am opposed to an estate tax repeal. Although it would benefit me personally, the costs to our society as a whole and to the health and well-being of the nonprofit sector from such an action are far too high. If you share my personal concerns about this issue, I hope you will voice your views to your senators and representatives in Congress. Please note that the opinions expressed in this article are my own and do not represent VPP as an organization or the individuals on our team, board members, or investors.

Legislation is currently being considered that would permanently repeal the estate tax in 2010. Were this to become law, one of the most powerful stimulants for charitable giving would be eliminated with potentially devastating results for nonprofit organizations that depend on philanthropic giving for their survival.

Brookings Institution economists Jon Bakija and William Gale conducted a study that estimates that repeal of the estate tax “would reduce annual charitable giving in life and death by about $10 billion, the equivalent of eliminating all current grantmaking by the country’s 110 largest foundations.” My experience with family estate planning, as well as discussions I’ve had with others who are major philanthropic donors confirms that the estate tax is a strong incentive to charitable giving.

Furthermore, the Congressional Joint Committee on Taxation estimated that in the first year that the estate tax is permanently repealed, the federal government would lose more than $50 billion, rising to roughly $64 billion in 2013. Similarly, state revenue would drop an estimated $9 to $10 billion by 2010. Since roughly one-third of charity revenue comes from public funding, a repeal of the estate tax would also dramatically reduce the amount of public dollars available to charitable organizations. Taken together, these figures are staggering and the impact on our religious institutions, colleges and universities, hospitals, and community-based organizations will be profound.

My work at Venture Philanthropy Partners is giving me a front-row seat to this issue. I am privileged to work with some of the most creative and innovative human services organizations helping children here in the National Capital Region. As an engaged investor in these organizations, I’ve been able to gain a great appreciation for the depth and severity of the current funding crisis and its impact on these organizations’ ability to deliver much needed services.

These organizations are already struggling with reduced funding as foundations have pulled back their giving in the face of endowments hit hard by stock market declines. And for those institutions that depend on public funding, today’s cuts in federal, state, and local government spending are making it harder for them to balance their own budgets—a situation unlikely to change any time soon. So many children and families are not getting the help they need. Further reductions in charitable giving will mean more children will be without access to educational support, health care, and other human services.

Those who are calling for the repeal of the estate tax are also calling on private philanthropy to assume a larger and larger role in funding social and other services. Compared with public dollars, funding from philanthropy represents just a fraction of the money supporting nonprofit initiatives. Private philanthropy is already challenged to maintain current levels of giving. And although we all should push for philanthropy to be more effective in what it does, how can we assume that it could take on a substantive role in closing the gap in growing public funding shortfalls if we eliminate one of our most powerful incentives for charitable giving?

In the nearly 90 years that the estate tax has been on the books, charitable giving in the US has grown enormously. Millions of Americans have benefited from the work of the nonprofit organizations and institutions that have been the beneficiaries of this largesse. The estate tax has helped to fuel that growth. If repealed, there will be a significant drop in capital flow to charities and nonprofits. Let’s not eliminate something that has such a positive impact on the greater good.