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The nonprofit sector is in limbo as it braces for the impact of tax reform.
Tax changes Republicans have floated could hurt the sector, practitioners and lobbyists warn, even though lawmakers have promised to preserve the charitable giving deduction in an overhaul. But concerns for nonprofit organizations go beyond the deduction—fears abound that a larger standard deduction and lower individual rates will erode charitable giving, and the threat of removing a nonprofit politicking ban could damage a sector that prizes the separation.
Lobbyists and Capitol Hill staffers have privately said for weeks that a full-fledged tax revamp is unlikely, indicating that lawmakers may end up settling for a mix of temporary rate cuts and permanent provisions. But nonprofit experts told Bloomberg BNA they can’t afford to wait and see what happens, because the potential effects of existing proposals are too great.
“We continue to remain very concerned about a lot of the proposals we’ve seen on the table and don’t want to take anything for granted and assume it’s not going to happen,” said Nancy Berlin, policy director at the California Association of Nonprofits, which includes nearly 10,000 organizations.
Members of the House Ways and Means Committee pushed back against the idea that nonprofits would be hurt in tax reform, an outcome they say they want to avoid. Chairman Kevin Brady (R-Texas) has previously said he wants to “unlock” charitable giving in tax reform, a message he has also expressed in meetings with nonprofit groups.
It is widely expected that a comprehensive tax bill will double the standard deduction to $12,000 for individuals and $24,000 for married couples filing jointly, a decision House Speaker Paul D. Ryan (R-Wis.) confirmed in a speech Sept. 7. Doubling the deduction would mean few taxpayers would continue to itemize their returns—a big win for Republicans who want to simplify the tax code. But it also means those individuals will no longer be able to claim the charitable deduction.
Doubling the standard deduction and cutting the top individual rate would decrease charitable giving by as much as $13 billion, according to a May study from the Indiana University Lilly Family School of Philanthropy that was commissioned by Independent Sector. Donations in the U.S. totaled $373.25 billion in 2015, according to the study. Republicans haven’t announced final tax brackets, though they plan to condense existing individual brackets to three from seven.
One option supported by some in the sector is making the charitable deduction above the line, allowing all taxpayers to claim it. But that is a pricey choice. Under current law, an above-the-line charitable deduction would reduce federal revenue by $191 billion over 10 years. Under the GOP blueprint, such a move would reduce federal revenue by $515 billion over 10 years, according to the Tax Foundation.
Ways and Means member Peter Roskam (R-Ill.) said he has talked to nonprofit groups about an above-the-line deduction, but acknowledged it would be expensive.
“The question the nonprofit community has to answer is if we’re successful in doing that, will they enthusiastically endorse the tax reform plan? Changes like that don’t get made and then a group gets to sit on the side,” he told Bloomberg BNA Sept. 8.
Republicans could also turn the deduction into a tax credit, said Harold Hancock, a partner at McGuireWoods LLP and former committee tax counsel. Committee members, and other lawmakers such as third-ranking Senate Republican John Thune (S.D.), care deeply about the charitable community, he said.
“I think the members, to their credit, are open to hearing any and all ideas in this area. I think this gives you an indication of how much this matters to them,” Hancock said.
Ways and Means members may dig more into the nuances of charitable giving in meetings the week of Sept. 11, Rep. Erik Paulsen (R-Minn.) told Bloomberg BNA Sept. 8.
One of the biggest risks the sector faces in tax reform is repeal of the Johnson Amendment, which keeps churches and other tax code Section 501(c)(3) tax-exempt organizations out of political campaign activity, practitioners and lobbyists said.
Republicans hope to pass tax reform using reconciliation, meaning all provisions must relate to the budget in order to pass muster in the Senate. But a repeal of the Johnson Amendment, a red-meat issue, could be attached to another vehicle.
“It seems like there could be an opening if someone wants it badly enough,” said Allison Grayson, director of policy development and analysis at Independent Sector. The group has pushed for more guidance about proper political activity for nonprofits.
Brady has previously said he wants to repeal the ban as part of tax reform. Critics of the ban, like President Donald Trump, say it is a tool for the Internal Revenue Service to intimidate organizations. But nonprofit advocates say a repeal could draw in dark money to organizations that don’t have to release financial disclosures.
“Even just opening up the possibility of charities engaging a little bit for or against candidates during election years, potentially drastically changes the whole dynamic between charities and their donors, and how the public views charities and what they do,” said Rosemary E. Fei, a principal at Adler & Colvin in San Francisco.
There is widespread anxiety that the sector could be tapped for money as Republicans look to pay for steep tax cuts, practitioners and lobbyists said.
If the standard deduction is raised, money that would have gone to the charitable deduction will instead help fund the tax reform plan, unless an above-the-line deduction is created, Grayson, at Independent Sector, said. Republicans have said that is an “unintended consequence,” she said.
Proposals to broaden the unrelated business income tax, tax endowment earnings of certain colleges and universities, and remove a layer of tax on corporations are problematic, said Ruth M. Madrigal, a former attorney-adviser at the Treasury Department and a partner at Steptoe & Johnson LLP specializing in exempt organizations.
“Cutting any charity funding streams—whether charitable contributions or endowment earnings—cuts the ability to provide services to the needy. And I don’t think that tax cuts for those earning the most should be financed by cuts to services for those with the least,” she said in an email.
Still, exempt organization-related proposals included in former Ways and Means Chairman Dave Camp’s (R-Mich.) 2014 tax reform draft only brought in about $14 billion, which is “not enough to move the needle,” said Hancock, the former committee staffer who helped draft the provisions.
Rep. Tom Reed (R-N.Y.) has been working for months on a multifaceted proposal related to college endowments that would change the deductibility of certain donations and require the wealthiest colleges to put 25 percent of endowment earnings toward scholarships or face tax penalties. While some in the nonprofit sector view the plan as a pay-for, Reed said he doesn’t think of it that way.
“Everyone is nervous in tax reform,” Reed said. “But at the end of the day if they’re doing it right, if they’re fulfilling their public mission, they’re not going to have a problem with me.”
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