Heads Up: These Tax Reform Proposals Could Help or Hurt Nonprofits

Wednesday, August 16, 2017

Heads Up: These Tax Reform Proposals Could Help or Hurt Nonprofits

by Michael Hamill Remaley, Senior Vice President, Public Policy & Communications, Philathropy New York
This piece was originally published as the feature article of the August 2017 New York PhilanthroPost Policy Edition

After the failure to repeal and replace the Affordable Care Act, leaders of the U.S. House and Senate are even more determined to “win” with tax reform. If you thought the pressure was intense on House and Senate leaders to pass legislation that millions of Americans were paying close attention to, just think how much greater the pressure will be to pass any tax reform legislation. It is immensely important that the philanthropic sector understand what is at stake and participate in the public discussion of tax reform to the extent that is legally allowable.

Philanthropy New York has taken one official position that touches on the issues at hand – maintaining the full deductibility of itemized charitable deduction. Interestingly, many congressional leaders have vowed to keep the charitable deduction “in its current form.” However, there are many tax reform proposals being seriously considered that would essentially gut the charitable deduction or otherwise reduce funding going to nonprofits. Philanthropy New York’s Public Policy Committee will be meeting in September to discuss these and other state and local issues. 

Raising the Standard Deduction: Currently, 30 percent of Americans itemize their taxes. Raising the standard deduction would drastically reduce the number of people itemizing (estimates of current proposals say it would go down to five percent) who would itemize and utilize the charitable deduction. This, combined with the proposal to reduce the top marginal tax rate to 35 percent, would have a negative effect on charitable giving, with giving decreasing between $4.9 and $13.1 Billion, according to an Independent Sector study released this past spring. 

Floors and Caps on the Charitable Deduction: PNY took its stand on maintaining the charitable deduction in its current form in 2013 when the Obama Administration was floating proposals to cap charitable deductions for high-income earners.  Now, some lawmakers are advocating for a “floor” – a minimum income that must be donated to qualify for a charitable income. An income threshold for charitable deductions would hit nonprofits that rely on small and middle-income donors especially hard.

Eliminating the Estate Tax: As we noted in our 2017 Policy Slate list of issues we are following (we have not taken an official position on this issue), the Estate Tax is another tax incentive that impacts charitable giving. Most studies on the subject state that eliminating the estate tax will reduce donations going to nonprofits. Only the wealthiest estates pay the tax because it is levied only on the portion of an estate’s value that exceeds a specified exemption level -- $5.45 million per person (effectively $10.9 million per married couple) in 2016. The estate tax has been an important source of federal revenue for a century – it would generate about $275 billion over 2017-2026 under current law. While this is less than 1 percent of federal revenue over the period, it is significantly more than the federal government will spend on the Food and Drug Administration, the Centers for Disease Control and Prevention, and the Environmental Protection Agency combined. Importantly for the nonprofit sector, the existence of the estate tax is generally considered to be a strong incentive for charitable giving, and the Congressional Budget Office has stated that raising the amounts exempt from the estate tax will have the  effect of reducing charitable giving, in addition to the loss of revenue to the federal government.

Instituting a “Universal Charitable Deduction”: Because raising the standard deduction and decreasing marginal tax rates would decrease charitable giving substantially, many in nonprofit associations are advocating for (and some leaders in congress are receptive to) extending the charitable deduction to all taxpayers, regardless of whether or not they itemize. This would cancel out the negative effects raising the standard deduction would have on charitable giving and increase donations to nonprofits by $4.8 billion. According to Independent Sector research, expanding the charitable deduction to non-itemizers would have a relatively small effect on revenue, decreasing revenue by .4 percent to .5 percent. 

Reducing Federal Revenues Overall: Aside from the various tax reform proposals that would directly affect charitable giving, the philanthropic sector should remain concerned about the effects of tax reform that would lower federal revenues would have on the nonprofit sector. We noted in our 2017 Policy Slate in issues we are tracking (again, we have not taken an official policy position on this issue), “The nonprofit sector has seen its capacity severely diminished over the past two decades of ceaseless government budget cuts at the federal and state levels.  Philanthropy New York is generally opposed to tax reform legislation that would further decrease federal revenues that lead to further cuts in spending that would broadly impact the nonprofit sector.”

The nonprofit sector has been hurting financially for decades, in large part because of various  policies at the federal, state and local levels that have starved the very organizations that do so much to keep our communities healthy and thriving. But things could get even worse if federal tax reform puts the nonprofit sector on the chopping block.

Philanthropy New York will be working with our colleagues at the United Philanthropy Forum, the National Council on Nonprofits, Independent Sector and Council on Foundations to inform our members and advocate on behalf of the communities we serve.  Stay tuned.

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