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The fears of the nonprofit community have been realized in the Republican tax reform bill.
Nonprofit advocates have long worried that an increased standard deduction could erode the value of the charitable giving deduction and chill donations. The bill ( H.R. 1) also includes a phaseout of the estate tax and no above-the-line charitable deduction. It imposes an excise tax on college endowment income and eases restrictions on religious groups engaging in politics. The combination of those provisions caused a furor on the bill’s first day.
“It’s going to be a disaster for charities,” said Howard Gleckman, a senior fellow at the Urban-Brookings Tax Policy Center. “They’re going to go crazy.”
Republicans have said for more than a year that they hope to encourage charitable giving in a tax overhaul. But some nonprofit advocates said their concerns about how a larger standard deduction would erode donations have gone unanswered in the bill. It is widely understood that a larger standard deduction means fewer taxpayers will itemize their returns—or be able to write off donations.
The bill’s nonprofit-related provisions would raise $3.2 billion, according to the Joint Committee on Taxation ( JCX-46-17). The bill also includes a 20 percent excise tax on compensation of more than $1 million paid to any of the five highest-paid employees at nonprofits, a $3.6 billion revenue-raiser, the JCT said Nov. 2.
The bill will spur the economy, growing individuals’ paychecks and “helping them donate more of their hard-earned money to causes they believe in,” according to a House Ways and Means Committee section-by-section summary released in response to bill criticisms.
The bill is expected to be tweaked in the coming days after House Ways and Means Committee Chairman Kevin Brady (R-Texas) releases a chairman’s mark.
It isn’t clear whether nonprofit provisions would be among the adjustments. Rep. Erik Paulsen (R-Minn.), a member of Ways and Means, said he didn’t think a universal deduction would come up in that document.
Still, Rep. Mark Walker (R-N.C.) said he would push for a universal deduction so all individuals could still claim the tax benefits of charitable giving. He introduced a bill Oct. 6 that would allow taxpayers who take the standard deduction to deduct charitable contributions up to an amount equal to one-third of the deduction.
Dan Cardinali, president and CEO of Independent Sector, told Bloomberg Tax he met Oct. 30 with White House National Economic Council Director Gary Cohn and Shahira Knight, a former executive at Fidelity Investments who works on tax policy on the NEC, to sell the idea of a universal deduction. Though Cohn and Knight didn’t make any commitments, they seemed open to the idea, he said.
Religious organizations that are tax-exempt would be allowed to make political comments in the ordinary course of their operations, a rollback of the decades-old Johnson Amendment, according to the bill. The amendment imposes a ban on 501(c)(3) organizations participating in politics. The ban would seemingly still apply to other 501(c)(3) organizations. While the area isn’t one the Internal Revenue Service has been auditing in recent years, repealing the amendment has been a priority of Republicans and President Donald Trump, who feel it lets the agency intimidate organizations.
“We don’t need to protect government from our faith groups. We need to protect our faith groups from government. I don’t want the IRS looming over our faith leaders in the community as they express their religious freedoms,” Brady said Nov. 2.
The provision could lead organizations to try to establish some sort of religious operation in order to engage in politics scot-free, said Philip Hackney, an associate law professor at Louisiana State University Law Center. Hackney is a former senior technician reviewer in the IRS Exempt Organizations Division.
It also opens up the potential for dark money to flood into the sector, since 501(c)(3) organizations don’t have to report their donors, Hackney said.
“I think this one is worse than the ones I’ve seen before,” Hackney said of the provision, compared to past Johnson Amendment-repeal proposals.
House Majority Whip Steve Scalise (R-La.) and Rep. Jody Hice (R-Ga.) introduced a bill (H.R. 781) in February that allowed tax-exempt 501(c)(3) organizations to make some political statements as long as they are minimal. Another bill (H.R. 172) from Rep. Walter B. Jones (R-N.C.) removed the language entirely.
First reported by Bloomberg Tax, the bill would impose a 1.4 percent excise tax on the endowment earnings of wealthy private colleges and universities.
It also would end deductibility for donations that are tied to seating licenses at sporting events. Current law allows an 80 percent charitable deduction of the amount paid to purchase tickets for athletic events.
The endowment tax in the bill applies to private colleges and universities that have at least 500 students and assets—other than those used directly in carrying out a school’s educational purpose—valued at $100,000 or more per full-time student. The provision doesn’t apply to state institutions. It would raise $3 billion over a decade, making it a major money-maker in the nonprofit sector, according to a JCT estimate included in a summary of the bill.
“It cuts down on the revenue that is currently going to pay for university services to students, because this chunk of money will go to the government. Either the colleges have to replace that chunk of money or cut services. Either way, the students are in the crosshairs,” said Ruth M. Madrigal, a partner at Steptoe and Johnson LLP. Madrigal is a former attorney-adviser in the Office of Tax Policy at the Treasury Department.
Rep. Tom Reed (R-N.Y.) has previously floated the idea of setting a 25 percent payout requirement on endowment earnings so that schools would be pushed to fund more scholarships. This bill doesn’t include such a requirement, though staff in Reed’s office has pushed it for the last two years in the House and Senate.
Under current law, donations to charities and foundation can be deducted up to 50 percent of a donor’s adjusted gross income. The bill would increase that threshold to 60 percent and retain a five-year carryover period.
That change is likely meant to mitigate the effects of a larger standard deduction and potentially lower rates of charitable giving, said Allison Grayson, director of policy development and analysis at Independent Sector.
Still, she said, “it doesn’t necessarily speak to this problem that philanthropy and charitable giving within the sector and how it’s resourced will be driven by large, wealthy, and well-resourced households, and what does that mean for our sector and our work?”
With assistance from Kaustuv Basu in Washington.
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