Legislative Affairs Report

Legislative Affairs Report

NEAHP Board of Directors Meeting of November 8, 2019

Submitted by Richard P. Solomon, CFRE

1. DC Download (from Independent Sector, 9.23.19) by Ana Montañez

Momentum on State and Local Tax (SALT) Deduction

Democrats will push to include a temporary repeal of the current $10,000 cap on annual state and local tax (SALT) deductions in a year-end package, according to a senior member of the Ways and Means Committee. Rep. Bill Pascrell (D-NJ) and Rep. Mike Thompson (D-CA) said last week that they hoped to have legislation ready for a committee markup in October.

Rep. Pascrell is the author of a bill to permanently eliminate the $10,000 cap, which was a key feature of the 2017 tax code overhaul. His plan was to partially offset the cost of nixing the cap by raising the top marginal tax rate on individuals from 37 to 39.6%, which is where it was before the Tax Cuts and Jobs Act.

[NOTE: DC DOWNLOAD REPORTED ON 10.29.19 THAT THE SENATE REJECTED THE BILL 52-43]

Charitable Giving Legislation Adds Cosponsors

Reps. Chris Smith (R-NJ) and Henry Cuellar (D-TX) continue to add cosponsors to H.R. 651, which would create a universal charitable deduction that is available to all taxpayers whether they itemize their taxes or not. They are now joined on this bill by 15 Democrats and 8 Republicans. Tell your legislators to make the tax code fair and help every American give to charity.

More Concerning Giving Data: Number of Donors and Dollars Keeps Dropping

The 2019 Second Quarter Fundraising Report from the Fundraising Effectiveness Project shows a year-to-date decline in charitable giving in 2019 compared to last year, with a 5.8% decline in the number of donors, a 7.3% decline in dollars raised, and a bigger decline in gifts at the middle and larger sizes, according to Nonprofit Quarterly.

2. DC Download (from Independent Sector, 10.29.19) by Ana Montañez

Presidential Campaign Proposals and Nonprofits

Earlier this month, Vice President Joe Biden’s presidential campaign released a $750 billion higher education plan aimed at investing resources in community colleges and making them more affordable and accessible to more Americans.

Biden would pay for the $750 billion plan by eliminating a complex tax provision called “stepped-up basis,” which adjusts the value of inherited assets in a way that allows heirs to avoid paying taxes on any appreciation in value the asset accrued during the decedent’s lifetime. Biden would also cap at 28% the itemized deductions the wealthiest Americans can take. Capping the value of the charitable deduction would have long-lasting negative consequences on the charitable organizations upon which millions of Americans rely for vital programs and services and would exacerbate alarming trends facing charitable giving.

3. Half of Wealthy Donors Changed Their Giving Patterns Due to Tax Law, Study Says (from Chronicle of Philanthropy, 11.5.19) by Michael Theis

Half of wealthy donors changed their giving habits in 2018 in response to the 2017 tax law, according to a new survey from Fidelity Charitable.

Seventy-six percent said their annual giving stayed level, and 15 percent increased their giving year-over-year, according to the survey. Only about 9 percent said they gave less than in the previous year.

Instead, the tax law, which roughly doubled the standard deduction, prompted donors to change the way they give, using tactics like "bunching" or "bundling" in which they made larger-than-usual contributions one year and none in the next year to maximize the tax benefits.

The survey polled 475 "affluent and high-net-worth charitable donors who itemized tax deductions two of the last three years."

Other findings from the study:

  • Of the 9 percent of donors who said they decreased their giving, 48 percent said changes to the tax law were the primary reason.
  • 75 percent say they will keep their giving about the same in 2019, and 14 percent say they will give "notably more." Eleven percent say they will probably give less.

32 percent of wealthy donors were either somewhat or very surprised by their tax situation in 2018 — particularly baby boomers, 40 percent of whom reported being either somewhat or very surprised. Of all of the survey participants who were taken aback by their tax bill, 55 percent said their tax situation was worse than expected. Again, baby boomers they felt the pain more than millennials or Gen Xers, with 68 percent saying their 2018 tax bills were worse than expected.

4. 68% of Voters Favor Political Candidates Who Would Help Charities (from Chronicle of Philanthropy, 10.25.19) by Dan Parks

Sixty-eight percent of registered voters would be more likely to support a candidate for political office who advanced policies to help charities serve their communities, according to a new survey by Independent Sector. That support was highest — 79 percent — among voters ages 18 to 24.

"While trust in institutions continues to dip across the country, this is a clear indication that nonprofits remain a trusted voice for our communities and that all candidates should be regularly engaging civil society to inform their own policy decisions," said Dan Cardinali, the CEO of Independent Sector, a membership organization of nonprofits, foundations, and corporations.

The study also found that 75 percent of voters favor new rules that would make it harder for politicians to misuse charities "to avoid disclosure and rules on campaign finance limits."

TargetPoint Consulting conducted the survey of 1,005 registered voters nationwide. The margin of error is plus or minus 3 percent.

5. Lawmakers Clash Over Whether to End Tax-Exempt Status for “Hate Groups” (from Chronicle of Philanthropy, 9.20.19) by Michael Theis

Lawmakers on Capitol Hill clashed Thursday over what, if anything, to do about nonprofits that some critics call "hate groups," with Democrats saying it should be easier strip their tax-exempt status.

"If we say hate can have no safe harbor in the United States, the next thing we have to say is that hate groups can find no comfort in the U.S. tax code," Democratic Illinois Rep. Brad Schneider said during a hearing of the House Ways and Means Oversight Subcommittee.

Republicans countered that such efforts were thinly veiled attempts to silence conservative voices.

"The IRS should not be used as a political tool to discriminate against organizations with differences of viewpoints and policies," said Republican Illinois Rep. Darin LaHood.

A 2016 Chronicle of Philanthropy analysis found that 60 organizations labeled as hate groups by the Southern Poverty Law Center were registered as tax-exempt nonprofits.

The hearing also underscored the difficulty Congress would face in trying to strip certain groups of tax-exempt nonprofit status. Navigating the First Amendment and other constitutional protections is one concern; the persistent decline in IRS nonprofit resources, oversight, and enforcement is another.

In fiscal year 2018, about 1.6 million organizations filed Form 990 returns, said Marcus Owens, a tax lawyer and former director of the IRS exempt organizations division. "In that year, the IRS closed only 2,816 examinations of organizations that filed those returns."

He added: "The IRS has systematically dismantled the enforcement structure that was in place for 25 years."

Owens said one way to approach the issue would be to expand the capacity of the IRS oversight offices for nonprofits. Another more radical proposal would be to establish a new regulatory agency focused solely on nonprofits and charities, similar to agencies that exist in Canada and Britain.

Eugene Volokh, a legal scholar with the UCLA School of Law, told lawmakers he feared any attempt to strip hate groups of tax-exempt status, no matter how well-meaning, could be weaponized against more benign groups in the future. He pushed lawmakers to avoid creating "viewpoint-based rules" for nonprofits.

"There is a constitutional right not to be discriminated against based on viewpoint," said Volokh. "I think some on this committee would not trust a Trump administration to administer viewpoint-based rules, just as some would not trust a Bernie Sanders administration to do so."

6. Don’t Delay Deductions for Gifts to Donor-Advised Funds (from Chronicle of Philanthropy, 10.7.19) by Kate Harris & Daniel Hemel

Donor-advised funds reeled in a record-breaking $29 billion in contributions last year, and with new wealth comes heightened scrutiny. Critics charge that DAFs are warehousing philanthropic dollars, with contributions pouring in but only trickling out. The warehousing phenomenon is all the more objectionable, say critics, because DAF donors can claim tax deductions when contributions go in even though years may pass before any money reaches active charities.

The latest proposal for DAF reform comes from Roger Colinvaux and Ray Madoff, law professors at Catholic University of America and Boston College, respectively. Colinvaux and Madoff are thoughtful and accomplished scholars of nonprofit law whose ideas attract wide attention — and rightly so. Their suggested reform — under the headline “A Donor-Advised Fund Proposal That Would Work for Everyone” — would deny DAF donors a charitable-contribution deduction until money is distributed from their accounts to an active charity. At the time of distribution, under Colinvaux and Madoff’s proposal, donors would be able to deduct the amount paid out to charity (which may be more than donors put in if their DAF investments appreciated in the interim). This, the authors argue, would encourage DAF donors to put their charitable funds to use quickly rather than allowing dollars to languish in DAFs for lengthy periods.

Colinvaux and Madoff’s idea is, in some respects, a “light touch” approach to DAF reform. Contrast their proposal with alternatives that would require DAFs to distribute funds within a short timeframe (e.g., five years) or to pay out a certain fraction of their assets annually (e.g., 7 percent). Colinvaux and Madoff would not require anyone to do anything; they would instead delay (but not deny) tax benefits. Theirs is a nudge rather than a hammer.

Nonetheless, the Colinvaux-Madoff proposal would have wide-ranging ramifications for DAFs and their donors. It would stymie taxpayers who seek to use DAFs to spread philanthropic activity across the life cycle. It would dramatically reduce the tax benefits of DAFs for middle-income donors. And it raises the potential for unintended and unwanted consequences.

Timing the Incentive to Donate

Start with the implications for life-cycle giving. The charitable-contribution deduction — being a deduction, rather than a credit — is most valuable for high-bracket taxpayers. It’s also capped as a percentage of adjusted gross income so taxpayers can claim larger (and more valuable) deductions in their peak income-earning years. As a result, individuals have an incentive to donate when their take-home pay is highest, which — not coincidentally — is also when they are busiest.

DAFs allow taxpayers to claim charitable-contribution deductions when those deductions are most valuable and then distribute funds to charities when they have time to do so thoughtfully. (Private foundations serve the same purpose but with higher start-up and maintenance costs.) Colinvaux and Madoff’s proposal would undo that benefit. If taxpayers cannot claim deductions until DAF dollars are distributed, then taxpayers will again face a stark choice between rushing their donation decisions or forgoing maximum federal tax benefits. It’s hard to see why, from a societal perspective, that’s an attractive result. 

The life-cycle giving function of DAFs is all the more significant in the wake of the December 2017 tax law, which nearly doubled the standard deduction and thus reduced the number of taxpayers who will itemize deductions on their returns. Some taxpayers have responded to this change by “bunching” their charitable contributions into a single year. For example, instead of making $10,000 of charitable contributions (well below the $24,400 standard deduction for couples) for five years and receiving no federal tax benefit as a result, a couple might donate $50,000 to a DAF one year and nothing for the next four. The taxpayer will itemize deductions in the bunched year and claim the standard deduction in others.

Colinvaux and Madoff would not outlaw bunching, but they would make it much more difficult. Not only would donors have to bunch their contributions into a single year, but they would have to bunch all of their distributions into that year too. This raises the same concern as above about rushed decision making. It pushes philanthropy to operate on federal tax law’s timetable.

Bunching, to be sure, is only necessary because of the way Congress has chosen to structure charitable tax benefits. As Colinvaux and Madoff (and others) have argued, a better approach would be a charitable credit available on equal terms to all taxpayers — regardless of their tax bracket and whether or not they itemize deductions on their returns. While a well-designed charitable credit would obviate the need for bunching, enacting the Colinvaux-Madoff proposal piecemeal without a broader reform of charitable tax incentives would eliminate an imperfect fix without solving the underlying problem.

A Boomerang Effect

Beyond the implications for life-cycle giving and bunching, Colinvaux and Madoff’s proposal has the potential to boomerang — to make DAFs more attractive and to encourage taxpayers to delay donations even longer. The reason is simple: Funds inside a DAF grow tax-free while funds outside a DAF don’t. Under Colinvaux and Madoff’s proposal, then, donating to a DAF and keeping the money there would be like investing your charitable contribution deduction in a Roth IRA or any other tax-exempt account.

To make the math straightforward, imagine that the tax rate is 40 percent and that investments double over a decade. A taxpayer who gives $1 million to charity today will receive a charitable-contribution deduction worth $400,000. If she reinvests those funds, her $400,000 will become $800,000 pre-tax — or $640,000 after-tax — 10 years from now. If instead she puts $1 million in a DAF today, leaves it there for a decade, and then distributes the resulting $2 million to charity, she will be able to claim a deduction worth $800,000 then. Bottom line: She ends up with $640,000 after-tax without a DAF and $800,000 after-tax if she uses a DAF. The benefit is larger the longer she delays distributions.

There are a number of additional complications that Colinvaux and Madoff’s proposal would raise. One involves inherited DAFs. If a DAF donor dies and names her child as a successor, will the child be able to claim a charitable-contribution deduction when funds from the DAF are paid out? There is no obviously right answer to this question. Denying the deduction would put pressure on late-in-life donors to accelerate gifts lest their families lose the tax benefit for good. Allowing the deduction would open up the possibility that DAFs could be used as a tool for estate-tax avoidance.

Another wrinkle involves sponsor supervision of DAFs. Under current law, a DAF-sponsoring organization can refuse to honor a donor’s grant recommendation (e.g., if the donor recommends a grant to a tax-exempt hate group). If the donor retains an entitlement to a tax deduction when DAF dollars are distributed to an active charity, will it be harder for DAF sponsors to refuse grants to groups whose missions are antithetical to the sponsoring organization’s own values?

These concerns aside, Colinvaux and Madoff’s proposal advances an important discussion about DAF reform. Some current uses of DAFs should raise consternation even among DAF defenders. It’s hard to argue, for example, that private foundations should be permitted to use DAFs to satisfy payout mandates or skirt disclosure requirements. Our current regulatory regime for DAFs is certainly not perfect, and Colinvaux and Madoff are much-needed voices in a worthwhile debate.

But delaying deductions for DAF donors is no place to start. Not only would it undermine the utility of DAFs to life-cycle givers and small-dollar donors but it also could cause high-bracket taxpayers to hold money in DAFs even longer. Rather than the win-win that the authors describe, this is a DAF reform that should please no one.