Giving, Politicking, Endowments, and CEO Pay All Could Be Affected by Tax Measure

November 2, 2017 | Read Time: 10 minutes

WASHINGTON

Charity fundraisers could face new challenges persuading Americans to give under the tax measure House Republicans unveiled today, with some experts forecasting a $14 billion decline in giving. The Republican plan would also make sweeping changes in how at least some nonprofits operate by loosening decades-old limits on political activities, taxing nonprofits that pay executives $1 million or more, and placing new levies on the endowments of big, wealthy private colleges.

The Republicans’ proposal keeps the charitable deduction intact. But it nearly doubles the standard deduction, which would slash by millions the number of Americans who itemize their deductions and take a write off for their gifts. Nonprofit leaders say that would likely depress giving substantially.

Charities worked for months to convince lawmakers to mitigate the effect of an increased standard deduction by letting everyone, not just those who itemize, deduct charitable gifts from their income.

Lawmakers took a pass.

“This is a glaring, glaring negative,” said Hadar Susskind, senior vice president of government relations at the Council on Foundations. “It’s a huge miss.”

The House bill would also make fewer wealthy people subject to the estate tax, a change that could dampen the incentive for the ultra-rich to support colleges, hospitals, and foundations. The entire tax would be phased out in six years.

Tax Proposals Important to Charity in the GOP Bill

Standard deduction. The standard deduction would double. As a result, far few people would itemize their taxes, eliminating a financial incentive for millions of people to give to charity.

Partisan politics. Churches would be freer to engage in political activities as long as it was done in the “ordinary course of the organization’s business” and the spending on such activity was a “de minimus” amount. The draft legislation did not make clear whether this change would apply to all religious institutions or to other nonprofits.

Estate tax. The amount currently exempt from the estate tax, $5.49 million per individual, would double. After six years, the estate tax would be eliminated entirely. Many charity experts say the estate tax is a major incentive for wealthy people to give away their fortunes, and its elimination would hit big institutions like hospitals and universities especially hard because they rely the most on large bequests from wealthy donors.

Charitable deduction limit. The bill would increase to 60 percent the limit on how much adjusted gross income a taxpayer could write off by deducting cash gifts to qualified charities. The current limit is 50 percent (30 percent for gifts to foundations).

University endowments. Income on many private university endowments would be taxed at 1.4 percent. The tax would apply to institutions with assets of more than $100,000 per student. Prominent universities such as Harvard, Yale, Princeton, and Stanford universities would be affected, but Chronicle data shows that well over 100 lesser-known institutions also would be hit by the tax.

Foundation excise tax. The bill would replace the existing two-tiered tax on foundations’ net investment income (1% or 2% depending on how much they distribute in grants) with a flat 1.4 percent excise tax.

Politics and Nonprofits

In addition, Republicans aim to loosen limits on politicking by churches, an apparent carve out of a ban on such activity by nonprofits that is often referred to as the Johnson Amendment. According to the bill language, places of worship would be permitted to speak out on partisan matters as long as it is in “ordinary course of the organization’s business” and the spending on such activity remains a small share of the organizations’ budgets.

It is not clear from the draft legislation whether the rule would affect other types of religious institutions or other nonprofits.

Most nonprofit and religious leaders vehemently object to the change in the politicking rule because they say it would drag them into partisan politics. “This tax bill will deform, not reform, the tax law that protects our houses of worship,” Amanda Tyler, executive director of the Baptist Joint Committee for Religious Liberty, said Thursday. “Gutting the law that protects 501(c)(3) organizations from candidates pressing for endorsements threatens to destroy our congregations from within over disagreements on partisan campaigns.”

Tim Delaney, head of the National Council of Nonprofits, worries that all nonprofits could be covered by the loosening of the politicking rules.

“We cannot effectively serve our communities if we are invaded by the divisive partisan politics that are bedeviling our country,” he said in a statement. “The constitutionally suspect change proposed in the House bill would destroy the safe space where people can currently come together, ignoring party labels, to worship and solve community problems.”

Other Key Provisions

The tax bill would also:

Increase the share of income taxpayers can write off by deducting gifts to charities. Currently, taxpayers can write off up to 50 percent of their adjusted gross income by deducting gifts to charities and 30 percent for gifts to foundations. The new limit for cash gifts would be 60 percent.
Set the foundation excise tax at 1.4 percent. Currently, it is a two-tiered rate of 1 percent or 2 percent.
Levy a 1.4 percent excise tax on private college and university investment income at institutions that have at least 500 students and assets of at least $100,000 per student.
Impose a 20 percent tax on compensation of more than $1 million paid to nonprofits’ five highest paid employees. The tax would also apply to so-called “parachute payments,” or money paid out when top nonprofit executives or college presidents leave an institution.
Require foundations that acquire art to open their exhibitions to the public for at least 1,000 hours each year.
Eliminate limits on the value of tax deductions for people above a certain income threshold. Those limits often make charitable deductions less valuable.

Side Effects

While nonprofits are focused on issues that directly affect them, some facets of the measure would have indirect effects. For instance, the measure would lower tax rates for some Americans and that could mean they have more money to give to charity.

Still, many of the details in the bill may have some nonprofit leaders hoping it never arrives on President Trump’s desk, a distinct possibility given the opposition the measure has already encountered in some quarters.

Dan Cardinali, chief executive of Independent Sector, a membership organization of nonprofits and foundations that lobbied to broaden the charitable deduction to all taxpayers, said that the legislation does not reward charitable giving for people of all income levels.

“The bill is a pretty fundamental shift,” he said. “It turns the charitable deduction into a tax benefit that overly privileges the wealthy and disincentivizes the common citizen from being an integral part of a community solution.”

The combination of the estate-tax repeal and the doubling of the standard deduction would result in a loss of $14 billion in charitable donations, he said.

Mr. Cardinali said that Republicans attempted to cushion that loss by allowing people to deduct a larger percentage of their adjusted gross income, but he does not know whether that would matter. What’s more, he said it was troubling that such a measure only helps rich people, rather than encouraging all people to give more.

“They missed the point,” he said.

Brian Walsh, executive director of the Faith and Giving Coalition, noted that the House Ways and Means Committee was well briefed by nonprofit leaders on what proposed changes to tax law would mean for charitable giving, nonprofits, and foundations.

“We can’t help but be disappointed,” he said.

Taxing Endowments

The proposal to change the rules on how much tax foundations pay on their investments was cheered by tax experts.

Ruth Madrigal, a partner at the Washington law firm Steptoe & Johnson who works with a broad range of nonprofits, said that she is happy to see Republicans propose a set rate for the foundation excise tax.

Currently, foundation excise taxes on investment income are applied on a two-tier basis of 2 percent and 1 percent. If a private foundation makes grants that exceed its average payout amount over five years, it qualifies for a 1-percent tax. The result is that foundations make decisions on how much to award in grants based on their desire to qualify for the lower tax rate, not on the needs of their grantees, say those critical of the existing law.

Still, the 1.4 percent rate is higher than foundation leaders would like, and higher than the 1 percent fixed rate that was included in a bill authored by former Rep. Dave Camp in 2014, according to Ms. Madrigal.

She and others said they worry about the implications of taxing big college endowments as the House bill would.

“I get concerned that it could be expanded to other types of charitable organizations,” Ms. Madrigal said of the excise tax. “And if you’re starting to tax the investment income of charities, what does tax-exempt even mean?”

She added: “These are organizations that have some streams of revenue, investment income being a significant one, because donors have given assets that are intended to be used in perpetuity for charitable purposes.”

Estate Tax

In addition to making fewer people subject to the estate tax, the bill includes a total repeal of the estate tax after six years.

Already, the tax affects only the very richest families in the United States, or 0.2 percent of the more than 2.6 million Americans who die annually. In 2017, just 50 small businesses and farms would be touched by the estate tax, according to an analysis by the Center on Budget and Policy Priorities.

The National Committee for Responsive Philanthropy took the lead in recent months to lobby against a repeal of the estate tax. Aaron Dorfman, president of the group, said the treatment of the estate tax was one of the worst aspects of the bill, which he described as “chock full of terrible ideas.”

Donor-Advised Funds

The Republican bill seeks to address concerns about donor-advised funds, but does not go as far as the last attempt by Congress to regulate the giving accounts. Critics of the funds say that too much money sits idle in the accounts for years, even though donors get an immediate tax deduction. In 2014, when then-Ways and Means Committee Chairman Dave Camp introduced broad tax legislation, donor-advised funds would have been subject to a 20 percent tax on money in accounts that had not been directed to a charity within five years.

In response to the Camp bill, organizations that sponsor donor-advised funds launched an intensive lobbying effort. Many community foundations sponsor donor-advised funds, and large financial services firms like Fidelity, Schwab, and Vanguard have created affiliated organizations that sponsor the funds.

The lobbying seems to have paid off.

The Republican plan would require the funds to annually disclose their policies for inactive funds. They would also be required to disclose the average amount of grants made from funds they manage.

Holding Out Hope

Steve Taylor, senior vice president and counsel for public policy at United Way Worldwide, said there is still a chance that the idea of broadening the charitable deduction to all Americans could make it into the bill.

With the House Ways and Means Committee set to consider the bill on Monday, he and others will be lobbying for an amendment.

They will have some help. Last month, Rep. Mark Walker, a North Carolina Republican, proposed a bill that would make a charitable deduction available to taxpayers who do not otherwise itemize. It included a cap on deductions equal to one-third of the amount of the standard deduction.

“We know there is going to be a limited number of amendments, but we are really hoping that the Walker language or something like that gets considered as an amendment and gets adopted,” Mr. Taylor said.