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Our View of Tax Reform and Nonprofits

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Dec 6, 2017

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     House/Senate Bill Comparison

On Nov. 16 the House approved H.R.1, The Tax Cuts and Jobs Act by a vote of 227-205. The Senate approved its version of the billl by a 51-49 vote on Dec. 2 Colorado's members of Congress voted along party lines.

Both bills lower tax rates for many individuals and businesses, repeal many tax credits and deductions, and reduce federal revenues by up to $1.5 trillion over the next decade.

Our View

We urge our members of Congress to vote NO on the Tax Cuts and Jobs Act. 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 levies new taxes on nonprofits. 

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

We are also concerned that the Senate may amend the bill to allow tax-deductible charitable donations to be used for political activity. Weakening or repealing the Johnson Amendment would undermine public confidence that nonprofits will use donations exclusively for charitable purposes.   


Our Concerns about the Tax Reform Bills 

Both bills undermine 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. 

Universal charitable deduction. We support allowing all taxpayers to deduct their charitable giving. This would make the charitable deduction available to 100 million more taxpayers and increase giving by up to $4.8 billion per year nationally.

Currently, a universal deduction is not part of either tax bill but the Universal Charitable Giving Act has been introduced in the House (H.R. 3988) and Senate (S.2123). The bill allows non-itemizers to deduct giving up to 1/3 of the standard deduction.

Estate Tax. H.R. 1 doubles the estate tax exemption for the next six years and repeals the tax permanently thereafter. The Senate version doubles the exemption permanently but does not repeal the estate 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 benefit up to 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 estimates a $4 billion reduction in bequests if the estate tax is 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. It also adjusts the volunteer mileage rate annually for inflation (The Senate bill does not change the volunteer mileage rate). These provisions should encourage increased giving and volunteering but are unlikely to offset reduced giving from these other changes. 

H.R. 1 opens the door to politics in the nonprofit sector. H.R. 1 creates an exception to the political activity ban (the Johnson Amendment) for communications made by nonprofits. Content must be “in the ordinary course of the organization’s regular and customary activities” and result in only “de minimis incremental expenses.” 

Despite appearing to be a narrow exception, nonprofits could take sides in elections and donors could take the charitable deduction for gifts that support political activity. Initially, the Joint Committee on Taxation estimated this will reduce federal revenues by $2.1 billion between 2018 and 2027 attributable to $6 to $8 billion of political contributions becoming tax-deductible. 

This change undermines public confidence that charitable donations will support community services rather than political activities. Increased IRS reporting and enforcement by state charities regulators may result from this change.

Protect Nonprofit Nonpartisanship

Note: The current bill does not make any changes to the Johnson Amendment.

Both bills reduce 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 Senate 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.  

Both bills tax particular activities to raise revenue from the nonprofit sector. Taxes on specific activities such as high executive compensation, investment income of private colleges, and sales of research take away revenues from nonprofits' community services.

As originally drafted, the Senate bill burdens nonprofits with modified Intermediate Sanctions rules and taxes. With these changes, the nonprofit organization would be penalized with a 10 percent excise tax for Excess Benefit Transactions. Current law already penalizes persons responsible for these transactions including board members who approve them and disqualified persons who receive excess benefits.

If a nonprofit manager relies on professional advice to determine compensation, nonprofit boards are absolved of liability for intermediate sanctions currently, The Senate bill eliminates this special rule but notes that relying on professional advice "is a relevant consideration in determining the manager knowingly participated in an excess benefit transaction." 

Also, under the IRS' Rebuttable Presumption of Reasonableness, compensation is presumed reasonable if the organization avoids conflicts of interest, has documented processes, and uses available comparability data. The Senate bill treats this as the minimum due diligence standard for nonprofits. 

Relying on professional advice and folllowing the IRS' reasonableness standard are no longer safe harbors to avoid intermediate sanctions. This will likely increase the cost of compliance for nonprofits and liability risks for organizations and board members.