Congress’s New Outlook

As Democrats take control, charities expect gains and losses

The shift in control of Congress has changed the political landscape for charities: They are far less likely to face new regulations that govern their operations — and they will also have a tougher time persuading Congress to pass any new incentives to stimulate charitable giving.

What’s more, government spending on programs that benefit charities and the people they serve is likely to increase — or at least avoid the deep cuts that Republicans have sought in recent years.

Because in their quest for political office many Democrats pledged to be fiscally responsible, they are not likely to be interested in passing new tax breaks for charitable donors, since the tax subsidies would add red ink to the federal budget.

“There’s some apprehension as to how much we’ll be able to get accomplished,” says Rodney Emery, vice president of government relations for the Council on Foundations, which represents many of the nation’s biggest grant makers.

Major Transition

Perhaps one of the most significant changes for charities will be in the leadership of the Senate Finance Committee. Sen. Max Baucus, Democrat of Montana, is expected to become chairman of the committee, which oversees the Internal Revenue Service.

Mr. Baucus succeeds Sen. Charles E. Grassley, the Iowa Republican who has undertaken numerous investigations of charity abuses and pushed for tough new rules he says are needed to stamp out wrongdoing by donors, trustees, and nonprofit organizations.

Mr. Grassley’s concerns were a key reason new legislation was passed in August to tighten the rules that govern many types of charitable activity, such as donating artworks and making gifts through so-called supporting organizations and donor-advised funds.

At the same time, he also pushed for the addition of a measure that would make it easier for older people to give their retirement savings to charities and for all people to make conservation gifts.

Mr. Baucus supported many of Mr. Grassley’s efforts, but he has different priorities — and issues affecting how charities operate and raise money are not key concerns, say numerous nonprofit officials.

“Senator Baucus doesn’t see reform of the nonprofit sector as top on his agenda at all,” says Diana Aviv, president of Independent Sector, which represents 550 charities and foundations. “The broader area of reform, more nonprofit oversight, is not going to be among his top 10 issues.”

Carol Guthrie, the communications director for Democrats on the Finance Committee, declined to elaborate on Mr. Baucus’s plans, saying only that he “will certainly continue to address nonprofit reforms.”

Lobbying Restrictions

Mr. Baucus in the past has demonstrated that he is troubled by close ties some charities have to lobbyists and lawmakers.

He introduced a resolution last year that would have required charities that are founded or controlled by senators to disclose any contributions from corporations or lobbyists.

In addition, under his leadership, the Democrats on the Finance Committee last month issued a report that criticized five conservative nonprofit organizations for helping the Washington lobbyist Jack Abramoff by laundering money and producing opinion articles for his clients. The report recommended that Congress pass additional laws to prevent such abuses.

That report has touched off a great deal of concern among nonprofit leaders. They say they fear their efforts to advocate on public-policy issues could be crippled if some of the recommendations are passed into law.

Among the ideas pushed in the report: expanding the definition of lobbying to include contacts with federal agencies, and requiring some organizations to disclose the names of corporations that support them and any payments that the groups make to lobbyists.

In addition, the report suggested changing how much donors would be allowed to write off when they give to charities that conduct advocacy work — and adding a requirement that donors be notified about what part of their contribution was deductible and what was not.

Those provisions could cause donors to stop supporting groups that lobby, says Perry Wasserman, managing director of 501(c) Strategies, a Washington lobbying group for nonprofit organizations.

Many donors may not understand that advocacy work is considered lobbying, Mr. Wasserman says. Getting a note from a charity saying that part of the donor’s gift was spent on an activity that is not tax-deductible “might become a red flag, and donors would say they’re just going to take their money elsewhere.”

In the House, Rep. Charles Rangel, Democrat of New York, is expected to take over as chairman of the House Ways and Means Committee, now under the control of Rep. William Thomas, a California Republican who held hearings on whether charities continue to deserve their tax-exempt status.

Mr. Rangel “has much more sympathy with the charitable sector than Mr. Thomas,” says a Ways and Means aide who spoke on condition of anonymity. “He thinks there’s a broad rationale for charitable tax exemption” and is disinclined to pursue an effort to redefine what types of charities should be eligible for tax-exempt status.

Collaboration Expected

Even with the shift in leadership, Republicans will still have significant influence, especially in the Senate, which is divided 51-49 between Democrats and Republicans.

As a result, Senator Grassley’s concerns about nonprofit abuses could still be felt by charities and foundations.

“We’ve had to work with Baucus on priorities of his; he’ll need to work with us on our priorities,” says an aide to the Senate Finance Committee who spoke on condition of anonymity. “They recognize that there’s been a lot of merit to the issues we’ve been raising, and we feel very comfortable about it.”

One factor that will make passage of any new legislation more difficult in the next couple of years is the approach of the 2008 elections, when the presidency as well as many Congressional seats will be up for grabs. Lobbyists say that campaign pressures will force lawmakers to make political calculations about which bills to support. That could leave charities, whose issues aren’t usually at the forefront of the political agenda, in the cold.

“The presidential primaries will be on us in a flash,” says Matthew W. Hamill, senior vice president for advocacy and issue analysis at the National Association of College and University Business Officers, in Washington. “So there’s going to be a balancing act between the headline-grabbing initiatives and the ones that involve charities.”

Following is a look at how issues of interest to charities are expected to fare in the new Congress:

Federal spending. Charities that for years have tried to protect government programs from budget cuts are hopeful that the worst is behind them, even with the tight federal budget.

Charities that seek federal aid for a variety of programs — to provide food to the needy, to pay for public-broadcasting programs, and to support education programs, among others — said they expected Democrats to be more receptive to such spending than Republicans have been.

“In terms of being able to have some positive discussions about policy, as opposed to just defending existing programs, it opens up a range of options,” says Andy Van Kleunen, president of the Workforce Alliance, a coalition of community colleges, unions, and other organizations that promote job training.

Charitable tax incentives. Nonprofit groups say they doubt Congress will be in a mood to approve tax incentives for charitable giving, largely because they would be costly to the federal treasury and difficult to pass with the federal budget deficit expected to top $339-billion next year.

Still, charities hope to persuade Congress to extend some temporary charitable tax incentives, particularly the provision that encourages people to channel retirement money to charity.

The provision, which allows people over 70 to give money from their individual retirement accounts to charity tax-free, is set to expire at the end of 2007.

“If we can keep it as a priority, if we can show success with what we have so far, if we can find an appropriate vehicle for the provision, that will be the key,” says Tanya Howe Johnson, chief executive officer of the National Committee on Planned Giving, in Indianapolis.

A provision that would offer charity tax breaks to people who do not itemize deductions on their federal income-tax returns faces a much tougher battle, charity officials say, in part because it could cost billions of dollars in lost tax revenue.

That proposal was added to legislation last year but was stripped out before it became law.

“No one has illusions about what the political climate is,” says Patrick Lester, policy director at United Way of America, which pushed hard for the provision last year. “But someone has to keep this on the agenda.”

Estate tax. With Republicans in the minority, efforts to permanently repeal the tax on the estates of wealthy individuals are unlikely.

Under current law, the estate tax has been gradually scaled back each year and will be repealed entirely in 2010. Without further action by Congress, however, the tax will be restored in 2011.

Many charities fear that permanent repeal of the estate tax would eliminate a powerful incentive for charitable giving.

While he would probably not call for a complete repeal of the estate tax, Mr. Rangel has not said publicly whether he favors other changes to it.

New standards for tax exemption. Both the House and Senate last year held hearings to determine whether nonprofit hospitals provided enough health care to the needy to justify their charitable status.

Mr. Thomas, the House Ways and Means Committee chairman, also sent a letter to the National Collegiate Athletic Association that questioned whether some college sports programs deserved tax exemptions.

Aides to Mr. Rangel say he has little interest in pursuing either issue.

Both Mr. Rangel and Mr. Baucus have said that they are more interested in extending health coverage to all needy Americans than in tightening the rules of tax-exempt status for the hospitals. They say concerns about charity hospitals not providing sufficient care are a direct result of the number of Americans who lack health insurance.

Nonprofit management. Independent Sector, which has devoted a significant amount of its resources to responding to Mr. Grassley’s concerns by proposing ideas for how to craft new legislation, says that next year it hopes to win support for a simple idea: requiring all charities to file their federal informational tax returns electronically.

Making more information easily accessible to the public “could do more to deal with problems in the sector than many other actions combined,” Ms. Aviv says.

Harvy Lipman and Peter Panepento contributed to this article.