WATCHING: Tax Reform Provisions With Implications for Philanthropy and Charity

U.S. CapitolBy Sue Santa, policy and legal consultant

For several years, we’ve been hearing promises of comprehensive tax reform. Both Congressional leaders and the Trump administration voice their commitment, and we’re told the President will release a plan soon. The President is slated to address Congress on February 28, so we may get signals then of what he has in mind. Congress too is fine-tuning its plan.

Congressional leaders aim for comprehensive tax reform to achieve several broad goals:

  • Simplify an overly burdensome and confusing tax code;
  • Lower rates and broaden the base (i.e., remove many deductions, loopholes);
  • Spur economic growth;
  • Level the playing field for U.S. corporations; and
  • Reinstate “fairness.”

Exactly how this will be achieved, at what cost, and whether those costs will need to be offset with tax revenues are issues that remain to be resolved. We also don’t know if a truly comprehensive overhaul—addressing both individual and corporate taxes—is achievable. It’s a monumental aspiration at a time when there’s very little agreement in Washington—in Congress, with the Administration, and within the political parties—beyond broad concepts. In the end, we might see slimmed back efforts.

With all this uncertainty, why should we be vigilant now? Don’t we have time? No, we don’t.

As Congress and the Administration tackle some very big issues in both individual and corporate tax provisions, the tax provisions that affect philanthropists, foundations, and charities will not be a focus. It’s up to the field to be informed, engaged, and strategic, understanding both the intended and unintended consequences of proposals. It’s important to be working with the tax staff who are drafting the legislation. The starting point for many proposals will be “taken off the shelf” from prior draft legislation, so we have some information on where the discussion should start.

We have an opportunity to shape our future, but we need to be active now. What are some issues we should be watching?

Individual Provisions: The Charitable Tax Deduction

We’ve been at this for over eight years: raising our voice to preserve the charitable deduction. Every year, President Obama’s budget and some Congressional proposals called for a cap on the charitable deduction. The goal: raise federal revenues.

The charitable deduction is most certainly on the table in tax reform. In this scenario, however, the stated goal is not to raise revenue; it’s to implement good tax policy. And although we hear from many Congressional members, “I love charity, and I support the charitable deduction,” there are several potential dangers ahead.

First, one scenario for simplifying the individual tax code is to increase the standard deduction, shifting a very large number of taxpayers from itemizing to taking the standard deduction. Today, more than 30% of taxpayers itemize; under some simplification proposals, that would reduce to 5%. Why does this matter? Giving USA estimates that over 80% of all individual charitable contributions are made by the 30% of taxpayers who itemize. If itemizers drop to 5%, what happens? It’s hard to argue against simplification, but we need to find ways to continue incentivizing giving, especially for taxpayers who consider the charitable deduction when making contributions and preparing their taxes.

Second, beyond limiting the number of taxpayers eligible for the deduction, several proposed scenarios would keep a charitable giving incentive, but with limitations. Taxpayers could receive the incentive only if they reach a threshold level of giving (“floor”), or would receive the incentive only up to a certain level (“cap”). Study after study shows that charitable giving would decline by billions of dollars annually if floors or caps are imposed.

One alternative that’s been suggested by some in the field is a tax incentive that allows all individuals to take the charitable deduction regardless of itemization. (Last week, the Charitable Giving Coalition hosted a fly-in to educate the Hill and propose a universal charitable deduction, without limitations.) There also are other provisions in the current tax code that apply to individual giving, such as caps on the amount of a taxpayer’s giving that can qualify for the deduction (i.e., a percentage based on adjusted gross income.) Increasing those limits or removing them altogether could increase giving.

If the tax code is being overhauled, everything is on the table.

Corporate Provisions: Endowments, DAFs, and More

The tax provisions that apply to philanthropic and charitable organizations generally fall within the corporate tax code. The major focus of corporate tax reform is leveling the playing field for U.S. corporations and repatriation. It’s unclear whether any of these big corporate issues will have ramifications on philanthropy and charities, but we’ll need to be watching for any unintended consequences.

Likewise, we’ll need to watch whether a host of issues that were addressed in earlier tax reform drafts, such former Chairman David Camp’s, are inserted into the bill. That draft included provisions on donor advised funds, private foundation excise tax, self-dealing, unrelated business income, supporting organizations, compensation, 501(c)(4)s  and a number of other issues.

One issue I’m particularly interested in is endowments. University endowments are under scrutiny. Members of Congress are taking aim, motivated primarily by constituent concerns of high tuition and mounting student debt. Lawmakers look at endowments and ask, “Why isn’t this money being spent for students.” Legislation has been drafted that would require universities to spend from their endowments for particular purposes or face penalty. It has momentum and could be included in comprehensive tax reform or as part of smaller tax proposals.

The danger for foundations is getting swept into lawmakers’ concerns about “stockpiles” of money not being spent, or not being spent the way they think it should. The story of philanthropic endowments is very compelling but not well understood. Foundations invest, over decades, many times the donor’s original philanthropic gift. Foundations should be telling this story, communicating the endowment’s value to the community by illustrating and quantifying how it enabled donations many times greater than the initial grant.

Skepticism about donor advised funds is related to the scrutiny of endowments—concerns about “stockpiles” and “parked money.” Although community foundations, national funds, and other donor advised fund entities have spent a great deal of time with lawmakers and staff over recent years, educating them about DAFs, I think some skepticism remains, and it’s not clear what shape that will take. Some possible proposals could include further “defining” DAFs and/or payout requirements by individual account.

Scope and Timing

Exactly how much more tax reform will cover is unclear. A truly comprehensive bill will be monstrous, and I question how much time and attention will be given to tax-exempt organizations. Consider this: With all the media attention on both the Trump and Clinton foundations during elections, we might have anticipated provisions on increased oversight. Likewise, with the focus on “who has money now,” we might have anticipated provisions addressing perpetuity and payout. But none of these issues has surfaced yet. One other interesting note is that there have been several changes within the tax writing committees, and some senior staff who were most knowledgeable about tax-exempt provisions have left the committees. We’ll get to know the new staff, educate them, and see how issues are prioritized.

Conditions are more favorable within the next 12–18 months for some movement on tax reform, for a couple reasons. Tax legislation is generally easier to pass at the beginning of any new administration. And given the long history of previous attempts at tax reform, a treasure trove of language and tactics currently “sit on the shelves,” meaning that legislators can develop proposals relatively quickly. The window for reforming the tax code is relatively short, however. Many believe that Congressional members become more resistant the closer it gets to elections, and November 2018 will be a significant mid-term. Add to that, there is little consensus among the White House, the House of Representatives, and the Senate on the mechanisms for achieving reform. This means that any changes to tax policy may be more piecemeal than comprehensive.

All that said, given the promises made by both Congress and the Administration that tax reform will be addressed, I anticipate that some version will be enacted in the next 12 months.

This is the second of a two-part series on the current political climate and implications for philanthropy, which Sue shared during a lunchtime discussion with the attendees of Exponent Philanthropy’s “990-PF Tax Seminar” on January 24, 2017. Read part one >>

See part one: Philanthropists Must Reset Government Leaders’ Expectations

sue-santaSue Santa is one of the nonprofit sector’s leading experts on advocacy, policy, and legislative and regulatory issues. She has served in senior leadership positions with both Council on Foundations and The Philanthropy Roundtable. A lawyer by training, Sue also practiced law at a leading Washington, DC law, government relations, and lobbying firm. Sue is currently an adjunct faculty instructor at Columbia University School of Professional Studies, where she teaches policy and advocacy.

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