Congress Likely to Float Ideas This Year — for the Next President

Nonprofits plan to use President Obama’s final year in the White House as a practice lap for a tax fight his successor is expected to face after taking office in 2017. House Republican leaders have said they’d like to start floating tax proposals in the coming months, and nonprofit advocates are eager to make sure that tax incentives for charities aren’t cut to free up revenue for other budget items.

“We expect to use this year to begin to prepare for 2017,” says Geoffrey Plague, vice president of public policy at Independent Sector, a membership organization for nonprofits. “We’d like lawmakers, when they are considering a proposal relating to the charitable sector, to think about the impact on the individuals and families in their communities rather than considering primarily, if not exclusively, the impact on federal revenue.”

In the meantime, little substantive action is expected from Congress in 2016. Broad tax legislation that would alter the charitable tax deduction and other items cherished by nonprofits is unlikely to advance, according to charity advocates. At best, nonprofits are hoping for action this year on some smaller items that were not included in a tax bill passed into law in December.

One of those proposals would allow donors to distribute money from their individual retirement accounts directly into a donor-advised fund. Currently, such transfers receive a favorable tax treatment only if they are made from a retirement account to a charity.

Another proposal would simplify and reduce the excise tax that private foundations pay on investment gains.

Developing a Tax Plan

House Republicans’ tax plans for this year will likely begin to coalesce after a GOP caucus retreat this week and a huddle of Republicans on the Ways and Means Committee scheduled for later in January.

Any debate over taxes will help inform lawmakers and the incoming president next year, according to Sue Santa, senior vice president for public policy at the Council on Foundations.

“There’s always talk about starting with a clean slate” at the beginning of a new administration, she says. “The fact is that members look to examples that have already been put forward.”

One such example is a tax plan written by Dave Camp, a former representative who chaired the House Ways and Means Committee. His plan would have placed limits on the charitable tax deduction and nonprofit executive pay, raised taxes on college endowments, and forced donor-advised fund account holders to make payments to charity within five years.

Nonprofit leaders fear that Mr. Camp’s plan, which was followed last year by a series of Congressional hearings on college endowments, put all charitable endowments at risk of stricter legislation.

Criticism “most often comes in the form of university endowments, but we can’t really rest easy that the conversation stays in that lane,” says Ms. Santa. “Once you open the door on endowments, they will be looked at more broadly.”

Close Scrutiny

Lawmakers will place nonprofits under tough scrutiny in 2017, agrees Steve Taylor, senior vice president of the United Way Worldwide.

But he and other nonprofit advocates can’t rest this year, he says. Although tax-overhaul efforts during the presidential campaign cycle are likely to be symbolic, there is always the possibility that a charitable tax provision could suddenly be used as an offset to pay for an unrelated item.

“You have to go in full force,” he says. “Better safe than sorry.”

To prepare, the organization has set up face-to-face meetings with more than 30 new local United Way chief executives this week. It also plans to confer with each of the members of the Senate Finance and House Ways and Means committees, the two tax-writing panels on Capitol Hill, says Mr. Taylor.

Meanwhile, there may be some daylight for nonprofits that depend on federal funding, he says.

For several years, Congress has failed to separately pass each of its spending bills, and often has financed government programs by passing a series of continuing resolutions, resulting in what Mr. Taylor calls a “broken” appropriations process.

“There’s a fair chance the process will more or less work in 2016,” he says. “A lot of nonprofits will be reengaged in educating members and advocating for their funding priorities.”

Campaign Debates

As Congress debates legislation, the presidential race is sure to dominate politics.

Candy Hill, Independent Sector’s interim co-chief executive officer, says she’s worried about how nonprofits will be portrayed during the primaries, through the conventions, and into next November, when voters cast their ballots.

Her concerns are especially acute this year because several candidates, including Donald Trump, Jeb Bush, and Hillary Clinton, have established foundations. In addition, she predicts that a scandal surrounding 501(c)4 nonprofit social-welfare organizations will resurface during the campaign. The Internal Revenue Service revealed in 2013 that it had placed some organizations applying for tax-exempt status under greater scrutiny based on the use of words like “Tea Party” and “patriot” in their names. In December, Congress limited the agency’s ability to promulgate new rules governing the organizations.

Others share her fear about the unpredictable nature of campaigns. Jeff Hamond, a Washington lobbyist who represents community foundations, says nonprofits need to be ready for anything during a presidential race.

Says Mr. Hamond, “I’m concerned that a flip comment in a debate or other political context will lead to harmful proposals down the road.”

Correction: A previous version of this story provided an incorrect title for Candy Hill. She is Independent Sector’s interim co-chief executive officer.