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Our View of Tax Reform and Nonprofits

Dec 20, 2017

Congress approved H.R.1, The Tax Cuts and Jobs Act on December 20. Votes by Colorado's delegation split among party lines.

Lydia McCoy, Colorado Nonprofit Association vice president and chief operating officer, on the Dec. 5 edition of Next with Kyle Clark regarding the impact of the Tax Cuts and Jobs Act on Colorado's nonprofits.

Key Provisions     What's Not in the Bill

House/Senate Bill Comparison 

Our View

The bill weakens the nonprofit sector's capacity to serve communities. It limits the charitable deduction to the top 5 percent of taxpayers, cuts federal revenues by $1.5 trillion, doubles the estate tax exemption, and increases the number of uninsured Americans by 13 million people

Nationally, this reduces charitable giving by as much as $20 billion and takes jobs away from as many as 264,000 nonprofit professionals. These changes would affect giving by most taxpayers with annual incomes less than $200,000 who contribute $1.8 billion of the $3.9 billion given in Colorado.

If Colorado's charitable giving is reduced by the same maximum percentage projected by the Tax Policy Center, giving would be reduced by as much as $250 million per year. 

Although the nonprofit community advocated for a universal charitable deduction and legislation had been introduced, Congress has not taken advantage of opportunities to mitigate the bill's negative impacts on the nonprofit sector.

Our Concerns about What's In the Final Bill 

The bill undermines key charitable giving incentivesCurrently, the charitable deduction can be taken by the 1 out of every 3 taxpayers who itemize their deductions. By nearly doubling the standard deduction, the charitable deduction can only be taken by the 1 out of every 20 taxpayers who would still itemize. 31 million fewer taxpayers would take the charitable deduction and studies estimate reductions in giving ranging between $4.9 and $13.1 billion or between $12.3 and $19.7 billion. This change is estimated to cut up to 264,000 nonprofit jobs.

Our analysis of 2015 Colorado tax data suggests that most Colorado taxpayers with incomes under $200,000 will save more on taxes by taking the increased standard deduction, leaving no federal tax benefit for them to increase their giving. These taxpayers contributed $1.8 billion of the $3.9 billion given in Colorado. If Colorado's charitable giving were reduced by the same maximum percentage projected by the Tax Policy Center, giving would be reduced by as much as $250 million per year. 

Estate Tax. Currently, H.R. 1 doubles the estate tax exemption through 2027 but does not repeal the tax. Without the estate tax, most taxpayers would not pay any federal taxes on unrealized gains of stock, real estate, and inheritances. Only 0.2 percent of estates nationally and 200 Colorado estates owed any estate taxes last year. Doubling the exemption is projected to limit estate taxes to about 70 Colorado estates.  

The estate tax is also an important incentive for charitable bequests and large gifts that reduce tax liability for wealthy taxpayers. Colorado’s nonprofits have received over $925 million in gifts of $1 million or more since 2005. In 2010, the tax was not in effect and charitable bequests declined by 37%. In 2011, bequests grew by 92% with the estate tax back in effect. The Tax Policy Center estimated a $4 billion reduction in bequests if the estate tax were repealed.

Other giving incentives. H.R.1  allows taxpayers to donate up to 60 percent of their Adjusted Gross Income (AGI) rather than 50 percent currently. This provision should encourage increased giving by itemizers but would not offset reduced giving due to the standard deduction increase,

The bill reduces federal revenues which also reduces many nonprofits' services. Reducing federal revenues and spending does not also reduce the needs of our communities. Rather than debating the efficiency and effectiveness of federal programs, this will trigger across-the-board cuts to programs that assist working families and support nonprofits’ services to Colorado’s communities. Nonprofits are asked to fill the gaps of leaner government with even fewer resources. 

The bill repeals the individual health insurance mandate. Repealing the individual mandate eliminates the penalty for individuals who lack health insurance coverage. The Congressional Budget Office estimates that this would reduce federal deficits by $338 billion, increase the number of uninsured by 13 million nationwide over the next decade, and increase average premiums in the nongroup market by10 percent.

This change is projected to decrease federal expenditures due to reduced use of individual subsidies and reduced enrollment in Medicaid. But it is projected to increase premiums because the non-group market would have fewer healthier people to ensure a diverse risk pool.  For nonprofits, this would increase the number of Colorado's uninsured and their health insurance costs, which likely increases demand for assistance from nonprofits.  

The bill taxes particular activities to raise revenue from the tax-exempt nonprofit sector. The bill takes away revenues from many nonprofits' services by taxing high executive compensation, investment income of private colleges, and multiple unrelated trades or businesses individually.