Legislative Affairs Report

Legislative Affairs Report

NEAHP Board of Directors Meeting of June 8, 2018

Submitted by Richard P. Solomon, CFRE

Note: All of the articles in this report concern the new tax law and a new Universal Deduction Bill that is before Congress. The three articles on the Bill appear first because they are the most recent news stories.

1. Bipartisan Bill Would Expand Charitable Deduction to All Taxpayers (Chronicle of Philanthropy, 5.15.18), Megan O’Neil

A new bill in Congress would allow all American taxpayers to take the charitable deduction, regardless of whether they itemize their deductions. Unlike a similar measure put forth last year, it would not include a cap.

Permitting all taxpayers to take the charitable deduction is sometimes called a "universal deduction" or an "above-the-line deduction." Introduced last week, the newest bill, called the Charitable Giving Tax Deduction Act, is co-sponsored by two House members, New Jersey Republican Chris Smith and Texas Democrat Henry Cuellar.

"Charitable organizations are the lifeblood of services to those in need in our society, and I am committed to a tax policy that amplifies their ability to serve our community," Smith said in a statement.

The bill comes five months after President Trump signed into law the first comprehensive rewrite of the tax code in more than 20 years. Under the new law, the charitable deduction remains unchanged. Still, an increase in the standard deduction — to $24,000 for couples and $12,000 for single filers — means 21 million fewer taxpayers will itemize deductions, including the charitable deduction, according to the Tax Policy Center. That, in turn, is likely to suppress giving by at least a few billion dollars, according to multiple analyses. Americans gave $281.9 billion in 2016, according to the annual "Giving USA" study.

The idea of an "above-the-line" charitable deduction has been around for years. In October, as Congress prepared to vote on the 2017 tax bill, North Carolina Republican Representative Mark Walker introduced the Universal Charitable Giving Act of 2017. He, too, proposed extending the charitable deduction to all taxpayers, but with limits. Walker’s bill would allow individuals taking the standard deduction to write off up to $4,000 in donations; the limit for couples would be $8,000. At the time, nonprofit leaders called the proposal a good first step but warned the cap could temper some donors’ giving. If a couple taking the standard deduction could only write off $8,000, why give more than that?

The Walker bill was never added to the House version of the tax bill last year, despite lobbying by charity leaders. It could still be taken up and tacked onto a larger bill in the future.

‘Huge Push’

The new bill from Smith and Cuellar is exactly what nonprofits have been looking for, said Steve Taylor, senior vice president and counsel for public policy at United Way Worldwide and a major nonprofit lobbyist on Capitol Hill.

"This has really been, from the sector’s perspective, the consensus solution to the unintended consequences on charitable giving as a result of the tax reform law," Taylor said.

He was frank about the chances of it advancing in Congress.

"It is going to take a huge push and big effort by the sector to get this legislation to move," Taylor said. "Sometimes it takes a year or two to get legislation enacted. The No. 1 most important thing that local charities can do is ask their representative to sign on as a co-sponsor to this bill."

In an op-ed published by the Chronicle in February, Eugene Steuerle, co-founder of the Urban-Brookings Tax Policy Center, said that nonprofit leaders need to mount a "long-term and broad campaign" to improve the image of the nonprofit world.

2. Join the Pep Rally: Universal Deduction Bill Introduced in the House! (from Independent Sector, 5.11.18), by Kristina Gawrgy Campbell and Allison Grayson

Break out your drums and pom-poms to join the nonprofit pep rally. Yesterday, Reps. Chris Smith (R-NJ) and Henry Cuellar (D-TX) introduced a universal charitable deduction bill in the House of Representatives.

The Charitable Giving Tax Deduction Act (H.R. 5771) would amend our tax code to all taxpayers the opportunity to take the charitable deduction. Independent Sector has been working closely with Smith’s office as they crafted the bill.

For more than 100 years, the charitable deduction has been a powerful incentive for giving and ensuring individuals have the power and ability to improve lives in their own communities. Unfortunately, this year marks a record low for the number of taxpayers able to claim the charitable deduction.  This change means charitable investments in our communities could be guided primarily by a very small number of citizens.

This new bill is cause for celebration (and action) across the nonprofit sector! Last year, Independent Sector also commissioned research by Indiana University Lilly Family School of Philanthropy, which shows that this type of universal charitable deduction would increase giving by nearly $18 billion. This infusion of resources will change lives and communities across the country at a time most charities face decreasing revenue and increasing costs and demand for their services. In addition, a 2017 bipartisan poll of voters found that 75 percent of all voters supported expanding the charitable deduction to all taxpayers.

“This bill helps us live up to the idea that charitable giving is ingrained in our national identity,” said Daniel J. Cardinali, president and CEO of Independent Sector. “Expanding the charitable deduction to all taxpayers will ensure that more people actively participate in building better futures for themselves, their neighbors, and their communities.”

“A true universal deduction is critical to correcting the impact of last year’s tax legislation,” said Vikki Spruill, president and CEO of the Council on Foundations. “At its core, our nation’s charitable giving policies should encourage and enable those small and medium-sized donors who serve as a powerful engine in the sector’s ability to assist communities. This legislation brings those givers back into the fold by expanding the charitable deduction to millions more.”

This is a pep rally, not a victory party. The hard work is ahead of us, so let’s strike up the trumpets and cheers. Now, it’s time for charitable organizations to get excited, come together, and collectively show our support for a policy that could transform all citizens’ ability to invest directly in solutions that work in their hometowns.

Take action today and ask your Members of Congress to sign on as co-sponsors to H.R. 5771.

 

3. Universal Charitable Deduction Bill Introduced in Congress (from AFP website, 5.15.18)

The Charitable Giving Tax Deduction Act was introduced by Rep. Chris Smith (R-N.J.) and co-sponsored by Rep. Henry Cuellar (D-Texas).

The bill creates a universal charitable tax deduction, which AFP has been advocating in Congress to offset potential losses resulting from tax reform changes. The Act does not limit the amount of charitable donations that could be claimed through this deduction. This provision would enhance giving by simplifying the tax code and creating fairness, allowing anyone to take a charitable deduction, including those who take the standard deduction.

Research by Independent Sector and the Lilly Family School of Philanthropy at Indiana University, as well as by the Tax Policy Center, estimated that annual charitable giving could fall by as much as $13 - $20 billion because of the doubling of the standard deduction in the new tax law.

However, the same research found that enacting a universal charitable deduction (in conjunction with the new tax law) would lead to an increase in giving of approximately $5 billion every year.

“We’re thankful for the work of Representatives Smith and Cuellar in introducing this important legislation,” said Mike Geiger, MBA, CPA, president and CEO of AFP. “The new tax law will likely change giving in a variety of ways, both positive and negative, so we believe a universal charitable deduction will be helpful in encouraging all Americans to give—and give more—to causes in their community and around the world.”

The AFP U.S. Government Relations Committee will be reviewing the legislation and determining how AFP will support the bill and move it forward through Congress before the federal elections in November later this year.

 

4. What’s in the New Tax Bill: Summary of Provisions (from AFP website, 1.31.18)

The new tax bill contains a number of provisions that affect fundraising and charities, both directly and indirectly. You can read about some suggested strategy and tactics for fundraising in light of the new bill here. Here, AFP has rounded up all the parts of the bill that affect fundraising and the charitable sector.

The following provisions will affect fundraising and the fundraising process, either directly or indirectly:

  • Doubling the standard deduction, from $6,000 to $12,000 for individual taxpayers, and from $12,000 to $24,000 for couples. With the higher standard deduction, fewer taxpayers will itemize (including charitable contributions). Research shows that giving could drop between $12 - $20 billion annually because of this change, though see here for more perspectives on what might happen in 2018.
  • Reducing the corporate tax, including the unrelated business income tax, to a flat rate of 21 percent. For many corporations, this will be a significant drop in their tax rate.
  • Increasing the adjusted gross income (AGI) limitation for cash gifts from 50 to 60 percent, but only for those donors who still itemize.
  • Expanding the estate and gift tax exemption to $11 million (for individuals) and $22 million (for couples) for estates of decedents dying and gifts made after December 31, 2017, and before January 1, 2026.
  • Eliminating the Pease Limitation, which acted as a surtax on high-income taxpayers by reducing the value of their itemized deductions by three percent.
  • Repealing a provision in the tax code that allowed the IRS to create an optional tax return that nonprofits could file in lieu of providing donors with written acknowledgment of contributions. With the repeal of this provision (for which the IRS was still in the process of developing regulations), donors must continue to substantiate any contribution of $250 or more for which they take a deduction with a written acknowledgement, as has been previous practice.
  • Repealing special rules related to a deduction if a taxpayer received the right to purchase tickets or seating at an athletic event, allowing the taxpayer to take some of the payment as a charitable deduction. With the repeal, no portion of the payment can be treated as a charitable deduction.

(NOTE: The remainder of the article, which deals with non-fundraising provisions, has been edited out. Please visit the AFP website for the full version.)

 

5. 4 Important Things in the New Tax Law You May Have Missed (from The Chronicle of Philanthropy, 1.25.18), by Megan O’Neil

The new tax law eliminates tax deductions for donations made to colleges in exchange for tickets to athletic events. The House Ways and Means Committee projected the change would generate $200 million annually for the U.S. Treasury.

When President Trump in December signed into law the biggest tax overhaul since 1986, he also ushered in a new era in the tax treatment of nonprofits and charitable giving.

One of the biggest changes, the doubling of the standard deduction, has been well covered by The Chronicle and others: With 21 million fewer households expected to itemize the charitable deduction, annual giving could decline by more than $12 billion, according to analyses by the Tax Policy Center. Middle-class donors and those groups that depend on them are expected to be most affected.

The doubling of the estate-tax exemption could further reduce gifts from estates by billions of dollars, according to at least some estimates.

Not everyone agrees with the gloomy forecast. Some nonprofit giving and tax-policy experts question projected declines in donations, citing a strong economy and arguing that no one knows exactly how tax policies affect giving behaviors. And the charitable deduction remains in place, they point out.

Nevertheless, fundraisers are already busy talking to donors about what the tax overhaul means for their giving.

In addition to the aforementioned provisions, a number of other changes will shape charitable giving and the management and operations of nonprofits.

The Chronicle dug into some of these less-well-covered pieces of the new law and talked to tax professionals and giving experts about how they may play out among donors and nonprofits.

Here is what you need to know.

The law increases from 50 percent to 60 percent the share of adjusted gross income a taxpayer can write off with cash donations to charities.

Who is looking to write off more than half their taxable income through the charitable deduction? In most cases, it’s retirees over the age of 65 living partially or largely on tax-exempt sources of income like Social Security and bonds, says veteran big-gift consultant Robert Sharpe.

Imagine a retired couple, he says, living off a combination of Social Security and the returns from several million dollars’ worth of stocks and bonds. The couple earns $40,000 of taxable money annually on their stock investments while taking in $80,000 in tax-exempt money. They make a $150,000 pledge to their college to be paid over five years.

"That is $30,000 year. That would mean that under a 50 percent AGI limit, they could only deduct $20,000. They would have to pay tax on the other $10,000 that they gave away."

Under the new 60 percent AGI threshold, Mr. Sharpe says, that same couple can now deduct $24,000, while having to pay taxes on just $6,000.

The change in law increases the amount many older donors can deduct when making outright gifts as well as when they use cash to fund a charitable gift annuity — wherein a donor makes a significant gift to a nonprofit and gets a partial tax deduction and a fixed stream of income from the nonprofit for life — or other split-interest gifts, he says.

The new tax law scraps a limitation on the value of the charitable deduction for high-income earners.

The "Pease limitation" reduced for high-income Americans the dollar value of itemized deductions — including the charitable deduction — by 3 percent of income over a set threshold. In 2017, the provision affected single filers making more than $261,500 a year and joint filers making more than $313,800.

For example, a couple with income of $1 million would have to subtract $20,586, or 3 percent of income in excess of the threshold, in this case $686,200, from deductions claimed with the Internal Revenue Service.

Mr. Sharpe says doing away with the Pease limitation is a win for high-income big donors. It essentially restores any decreased tax benefit resulting from the lower individual income tax rates under the new law, he says.

"For those people, the game hasn’t changed at all," Mr. Sharpe says. "It is exactly the same, with minuscule differences. And there are some people, actually, their tax subsidy is even more."

Like other parts of the tax law affecting individuals, the provision sunsets and the Pease rule returns in 2026.

(NOTE: The remainder of the article, which deals with unrelated business income tax and fringe benefits, has been edited out. Please visit the Chronicle website for the full version.)

 

6. Tax Law Eliminates Giving Incentive for 21 Million Americans, Study Says (from the Chronicle of Philanthropy, 1.12.18), by Megan O’Neil and Dan Parks

The new tax bill will eliminate the financial incentive for charitable giving for 21 million taxpayers, according to a new analysis by the Tax Policy Center.

Nonprofit advocates are deeply worried about the impact of the tax law, especially the doubling of the standard deduction for individual taxpayers. As a result of that provision, many Americans will stop itemizing their taxes and will no longer get any tax benefit for charitable giving.

The study says the number of itemizers will plunge from 37 million to about 16 million in 2018.

"Of course, people don’t give to charity just to get a tax deduction. Millions of non-itemizers contributed each year under the old tax law, and many will continue to do so," writes Howard Gleckman, a senior fellow at the Tax Policy Center, in a blog post about the new study.

The Tax Policy Center is a joint project of the Urban Institute and the Brookings Institution.

The study found that the share of middle-income households claiming the charitable deduction will fall from about 17 percent to 5.5 percent. Some charity observers worry that the tax bill will make charitable giving increasingly an activity mainly of the wealthy.

Uncertainty on Giving Behavior

Nonprofits say other provisions in the tax bill will diminish the incentive for charitable giving, including the reduction in tax rates for both corporations and individuals and the doubling of the estate-tax exemption to $22 million for couples.

The new study found that the changes to individual income taxes will reduce the average marginal tax benefit of charitable giving from 20.7 percent to 15.2 percent, or from about $63 billion to $42 billion.

The Tax Policy Center has previously estimated that the new tax law over all will reduce charitable giving by $12 billion to $20 billion annually.

Leslie Lenkowsky, professor emeritus of public affairs and philanthropic studies at Indiana University, cautioned that there is very little data about the giving behavior of people who don’t itemize. “All these estimates you are seeing are based on what we know about giving behaviors of people who itemize,” he said.

He added, “We now have a situation where people are going from being itemizers to non-itemizers. We don’t know at all how they are going to behave as a result of that change.”

Mr. Lenkowsky, who is a regular Chronicle columnist, also noted that the effects of the tax law could be offset this year by the surging stock market, which could spark a sharp increase in giving, especially by foundations that are seeing big gains in their endowments.

7. Companies Say Tax Cut Will Boost Their Giving, but Some Experts Are Skeptical (from the Chronicle of Philanthropy, 5.9.18), by Alex Daniels and Kristoffer Tripplaar

Feeling flush after a 40 percent corporate tax cut passed late last year, Best Buy set aside an additional $20 million for its corporate philanthropy. Boeing readied a $100 million boost for charitable causes, and U.S. Bancorp also credited the lower corporate tax when it made a one-time $150 million donation to its foundation.

With the windfall following passage of the tax cuts, many companies found they had a lot more to give. But, charity experts warn, the rush of corporate gifts probably won’t last, and some say the acts of generosity are actually just well-timed public-relations efforts. Others argue the new tax law may give companies less of a reason to make charitable donations.

Altria cited the tax reduction when it announced a $35 million bump in giving that it will spread over three years. In recent years, the maker of Marlboro cigarettes and Skoal chewing tobacco has contributed $55 million annually to charitable causes, with a focus on youth development, environmental sustainability, and the arts, mostly in its home turf around Richmond and in areas where it has manufacturing plants, including Nashville and Hopkinsville, Ky.

The additional grants will also support training for the people needed to replace workers on the verge of retirement at Altria factories.

"We saw an opportunity, after corporate tax reform was passed, to invest in our future, in our business, in our people and also our community," says Brian May, an Altria spokesman.

One-Time Bonanza

Corporate-philanthropy experts say nonprofits shouldn’t expect the new money to keep flowing.

Any increase in corporate gifts is likely to be a one-time bonanza for nonprofits, predicted Patrick Rooney, executive associate dean for academic programs at the Lilly Family School of Philanthropy at Indiana University. By lowering the corporate rate from 35 percent to 21 percent, Congress reduced the incentive for companies to give over the long haul. As with individual taxes, lower corporate taxes reduce the after-tax value of charitable giving.

Rooney doesn’t expect giving from businesses to reflect the entire decline in the corporate tax rate and drop by 40 percent. He says more vigorous study is needed, but using the same assumptions Lilly School researchers used in a study of the potential impact of the tax changes on individual giving, he says corporate giving could decline by $1.4 billion, a 7.6 percent drop from the $18.6 billion companies gave in cash and donated goods two years ago.

Recent announcements from companies, he says, likely resulted from "social pressure" to give back immediately following a hefty tax break.

The lower tax burden is permanent, and shareholders will press companies to notch higher profits each year. Those demands, Rooney says, will make it hard to sustain this year’s giving spree.

"In the future, those tax rates will be built into profit expectations," he says. "Right now they’re not."

Daryl Brewster, chief executive of CECP, a coalition of corporate leaders who push for companies to spend money on social causes, agreed.

The tax cuts are permanent, "but the big change happens just once," he says, adding: "This will be a huge one-time win."

Clearer Picture

Over the next few months, CECP will get a better picture of corporate giving plans as it reviews responses to its annual survey. Brewster says an informal survey of more than two dozen public-company participants in its February "Board of Boards" meeting for chief executives found that 12 percent of companies plan to dedicate most of the savings from the lower tax to "social investments," which could include higher wages, foundation grants, or investments in communities where they do business. More than half hadn’t decided how to use the extra money.

Over the next few months, those plans should come into focus. Humana, for instance, is in the process of deciding how to allocate the $550 million it expects to save on its tax bill each year, company spokesman Jim Turner said in an email. About half of that will go to higher pay or benefits for employees, investing in communities, or rewarding shareholders, he says. The company will also double its annual match, from $100 to $200, for most employees’ charitable gifts.

Alex Bakkum, senior philanthropic adviser at U.S. Bank Private Wealth Management Charitable Services, a division of U.S. Bancorp, also sees a short-term rise in corporate gifts. He informally polled about 60 of his clients and discovered about $1.3 billion in new corporate gifts that were either announced shortly after Congress passed the new tax code or were directly attributed to the lower rate.

He’s not sure whether the giving will be sustained; charities should act fast to take advantage of corporate largess, he says.

"Their motivations are going to be varied," he says. "But a lot of corporations seem excited about the opportunity to do something more for their communities. In the short term, there is a remarkable opportunity for organizations to meet or exceed their fundraising targets."

Dividends and Stock Buybacks

A newly vigorous sense of corporate generosity is just one part of the picture. At the same time companies are giving away millions, they are also paying bigger dividends to shareholders, buying back stock to boost the share price, and adding cash reserves.

The $150 million gift U.S. Bancorp made to its foundation, for instance, is just a fraction of the $910 million in reduced taxes related to the new law, according to a company statement. And the extra $35 million Altria earmarked for charity came during a fourth-quarter earnings call when it said it had paid out $4.8 billion in dividends in 2017 and would buy back $1 billion worth of company shares this year.

Boeing, which did not return calls, earmarked more than $160 million for its philanthropy in 2017, according to a company statement. As it announced its additional $100 million gift, it was embarking on an $18 billion share-repurchase program.

Best Buy, which declined to comment, appeared to use the new tax plan as an opportunity to more aggressively buy back shares. In March, it said it would dedicate an additional $500 million to a previously announced $3 billion repurchase plan.

The lower corporate rate factors very little into giving decisions, according to Linda Sugin, associate dean at the Fordham University School of Law. The recent spate of corporate gifts, she said, is more of a public-relations "gambit" than a response to the lower tax rate.

"Corporations make contributions to charity because they think it’s going to be good for the bottom line. The marginal rate of tax isn’t really going to change that," she says. "Corporations are not generous."