Senate’s Tax Bill Provisions Could Hurt Charities, Nonprofits Say

The Senate Finance Committee on Thursday put forth a tax bill that mirrors the House version in key ways in its treatment of nonprofits and giving, including some provisions that nonprofits say would dampen donations. It would preserve the charitable deduction, nearly double the standard deduction, and increase the share of income taxpayers can deduct for charitable donations to 60 percent.

Also like the House version, the Senate bill would create a 20 percent tax on the compensation of nonprofit executives earning more than $1 million and levy a 1.4 percent excise tax on the investment income of the biggest, richest private universities.

Still, the Senate tax bill departs from the House bill in marked ways.

Notably, Senate Republicans would leave untouched a law limiting the political activities of nonprofits. Known as the Johnson Amendment, the rule bars nonprofits from endorsing political candidates and spending on campaigns. Republican leaders in the House would ease those restrictions for all charitable organizations, allowing some partisan politicking and spending by nonprofits so long as it remains within the bounds of their normal operations.

Loosening of the Johnson Amendment has been a goal for years of a small number of conservative Christian leaders, who say they should have the right to advise church members how to vote without fear of losing their tax-exempt status. Loosening the ban is opposed by the majority of religious and nonprofit leaders, who contend it will create a chink in the dam of partisan politics, enabling opaque political spending via charities.

“The House bill has this incredibly damaging provision in it,” said Hadar Susskind, senior vice president of government relations at the Council on Foundations, a major nonprofit membership group in Washington. “It is good to see cooler heads prevail and not have that included in the Senate.”

The Senate bill also departs from the House bill when it comes to the estate tax. The Senate version would double the size of the estate affected by the levy — currently $5.49 million per individual — but keep the estate tax in place. Under their bill, House Republicans proposed doubling the eligibility level and then eliminating the estate tax entirely after 2024.

In addition, while the House bill would set the private foundation excise tax at 1.4 percent, the Senate bill has no such provision. Currently, investment earnings of foundations are taxed at a two-tiered rate of 1 and 2 percent. The 1 percent tax applies when foundations meet or exceed the legal requirement to distribute at least 5 percent of their assets on average. Foundations are taxed at the higher rate when they fail to hit that payout level.

Offering a Tax Break to All Donors

As Congress and the White House got ready to release a tax bill, nonprofit leaders worked for months to get Congress to take up what they dubbed a “universal deduction,” the extension of a stand-alone charitable deduction to all taxpayers. Currently, just those who itemize take the charitable deduction.

The doubling of the standard deduction — included in both bills — would slash the proportion of American taxpayers who itemize their deductions to 5 percent from 30 percent, analyses show. That would mean less, or no, incentive for those 95 percent of taxpayers to donate, say nonprofit leaders. They have calculated it would result in a $13.1 billion drop in giving.

Neither the Senate nor House tax bills includes a “universal deduction” provision, which nonprofit leaders say would more than offset the potential reduction in giving that the doubling of the standard deduction would produce. Such a move would cost the U.S. Treasury more than $100 million over 10 years, according to multiple estimates.

Dan Cardinali, chief executive of Independent Sector, a membership organization of nonprofits and foundations, said that as written, the bills offer incentives to spur the very wealthy to give — mostly those who would still itemize — while undercutting the giving of everyone else.

“We continue to be just profoundly disappointed, similar to HR1 on the House side, about the lack of a universal deduction,” Mr. Cardinali said Friday. “It just continues to send a powerful signal that the House and the Senate are privileging the wealthiest in America and really disempowering 95 percent of Americans.”

House Measure “Got Worse”

Changes to the House bill made during the House Ways and Means Committee markup caught many nonprofit leaders off guard.

“We feel like the direction of the bill has only gotten worse over the last week, not better,” Mr. Cardinali said.

Specifically, while the first version of the House bill would have allowed only houses of worship to engage in some limited political activity, an amendment presented by committee chairman Kevin Brady, a Texas Republican, and added to the bill on Thursday applies that change to all charitable organizations.

Nonprofit leaders warn that any loosening of the rule would fundamentally change the nature of nonprofit organizations and civil society at large. Among other things, individuals could make political donations through nonprofits, garnering themselves a tax deduction, and political candidates could pressure community groups to make endorsements in local campaigns, they argue.

Tim Delaney, president of the National Council of Nonprofits, said that such a change would mean that nonprofits “would lose the protection from demands from candidates for public office and their political operatives.”

“We neither need nor want this change in longstanding law,” Mr. Delaney said in a statement. “While couched in terms of ‘merely’ allowing endorsements, the provision has already been exposed by the Joint Committee on Taxation as a billion-dollar shift in campaign dollars that would cost the U.S. Treasury billions.”

Mr. Cardinali said nonprofits have long played an important role as independent, trusted partners to government.

“The thought, as an ED [executive director], of being put into a situation where I could get a call from a campaign that they want me to endorse or ‘we’re going to withhold government funding’ — that becomes hugely problematic,” Mr. Cardinali said.