House Tax Reform Bill Unveiled
With much fanfare this morning, the Speaker of the House and the Chairman of the House Ways and Means Committee unveiled the Republican Tax Cuts and Jobs Act (H.R.1), tax reform legislation that would lower tax rates for individuals and businesses and repeal or alter numerous tax breaks. The tax package is expected to reduce revenue over 10 years by at least $1.5 trillion, with some estimates projecting additional tax cuts costing as much as $4 trillion over that time period. To pay for additional tax cuts, the bill seeks to raise revenue from charitable nonprofits, such as excise taxes on
compensation of some nonprofit executives and an excise tax on college and university endowments. The bill also proposes altering the rules for tax exemptions in many areas. See the National Council of Nonprofits news release, Nonprofits, Nation Cannot Afford This Proposed Tax Reform Plan.
This special edition of Nonprofit Advocacy Matters provides a summary and brief analysis of many components in the 429-page tax reform bill that are of greatest interest to nonprofits and the people and communities they serve. At the outset, we highlight two closely followed issues:
- Nonprofit Nonpartisanship: The legislation includes language that would significantly weaken the protection from partisan politics that has for decades enabled charitable nonprofits, houses of worship, and foundations to remain focused on their missions and problem-solving in their communities. As written, the new provision (Sec. 5201) grants a partial exemption from the Johnson Amendment to houses of worship and their auxiliary organizations. The Johnson Amendment, signed into law by President Eisenhower, prevents 501(c)(3) organizations from endorsing or opposing
candidates for public office or diverting charitable assets from mission to fund partisan campaigns. As stated in the Council of Nonprofits’ news release: “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.” See more below.
- Charitable Giving Incentives: The bill nominally retains the existing itemized deduction for charitable donations, but by nearly doubling the standard deduction, it effectively puts this important incentive to give out of reach for 95 percent of American taxpayers. This decrease in the number of people who itemize would result in a decrease in charitable giving in the U.S. by up to $13 billion annually, according to a study from the Lilly School of Philanthropy. The measure fails to include a universal deduction or other incentive sought by a broad coalition of nonprofits and foundations
that would enable all Americans to receive a tax incentive for giving back to their communities.
Tax Reform Timing and Process
The House Ways and Means Committee is scheduled to start its review of the bill, called a “markup,” on Monday, November 6, and continue with marathon sessions until completing action during the week. The bill is then expected to go to the House floor during the week of November 13. The Senate is expected to release its separate version in mid-November. The stated goal of Republican leaders is to have a bill on the President’s desk by Christmas for signing before New Year’s Day.
As with the legislation to repeal and replace the Affordable Care Act earlier this year, there are limits to which elements of the bill can and cannot be revised in the budget reconciliation process. To balance the special rule in the Senate that allows passage of a budget reconciliation bill with a simple majority, as opposed to a 60-vote filibuster-proof margin, the Senate is prohibited from considering “extraneous matters” that are defined as provisions in the bill “unrelated to the deficit reduction goals of the reconciliation process.” That means items in the reconciliation bill
that do not produce a change in spending (outlays) or revenues. Extraneous matters can be stricken from the bill if a Senator raises a point of order and the Senate does not override the point of order with 60 votes. Likewise, provisions that increase the deficit beyond the first decade are subject to the point of order, which is why some elements of the bill are delayed or expire before 10 years and other elements sunset after 10 years.
What’s In the Bill?
Tax Rates for Individuals (§ 1001)
The tax bill would reduce the current seven tax brackets into four brackets of 12%, 25%, 35%, and 39.6%. The top rate is the same level as current law, but the bill would raise the threshold from $480,050 for couples, as set in current law for 2018, up to $1 million.
Deductions (§§ 1002, 1301-1312)
- Personal Exemption: Under current law, each member of a family is entitled to a $4,050 personal exemption that reduces the family’s tax burden. The tax legislation repeals personal exemptions for the taxpayer, spouse, and dependents. The taxpayer and spouse exemptions, according to the tax reform framework released in September, are incorporated into the larger standard deduction; the repealed dependent deductions, the framework asserts, are made up in expanded child tax credits (both discussed below).
- Standard Deduction: The bill would nearly double the standard deduction to $12,000/individual and $24,000/couple. Single filers with at least one qualifying child could claim a standard deduction of $18,000. These amounts would be adjusted for inflation. Experts predict that after this change only five percent of taxpayers will itemize their deductions, meaning that 95 percent of taxpayers would receive no tax incentive for donating to the work of charitable nonprofits. As noted above, experts calculate that charitable giving to the work of nonprofits will suffer more than $13 billion in losses every year.
- Itemized Deductions: The bill would retain the itemized deductions for -
The bill eliminates itemized deductions for state and local income taxes, medical expenses, and casualty losses.
- Charitable Giving. As currently written, the bill raises the amount of cash donations individuals can donate each year; increasing the limit from 50 percent of adjusted gross income (AGI) to 60 percent of AGI. The measure also fixes the deductible limit on volunteer mileage by switching from a fixed statutory amount ($0.14/mile) to a rate that is adjusted for inflation. The bill does not include a new deduction sought by the nonprofit community, a universal or non-itemizer deduction, that would enable all individuals to receive a tax incentive for giving back to their communities through charitable donations, instead of just five percent of taxpayers. Language that many
nonprofit advocates are promoting is found in the Universal Charitable Giving Act (H.R. 3988), which would provide a deduction with a cap of up to one-third of the standard deduction ($4,000/individual; $8,000/couple) for taxpayers who do not itemize.
- Mortgage Interest for existing mortgages, but limits the home mortgage interest deduction for newly purchased homes valued $500,000 or less, a reduction in the cap from $1 million today.
- Property Taxes, but only up to a cap of $10,000.
Estate Tax (§§ 1601-1602)
The Tax Cuts & Jobs Act would immediately double the exemption for the federal estate tax and repeal the tax after six years. Doubling the exemption excludes from coverage estates of individuals valued at under about $11 million and about $22 million for couples’ estates. Again, experts predict substantial losses in charitable giving as a result, as well as a substantial loss of revenue for the government.
- Endowments (§ 5103): The bill would impose a new excise tax of 1.4 percent on net investment income of nonprofit colleges and universities with assets (not counting those used directly in carrying out the institution’s educational purposes) valued at the close of the preceding tax year of at least $100,000 per full-time student. (Estimated to raise $3 billion.) The legislation comes after several major universities reported endowment investment returns in the double digits.
- Executive Compensation (§ 3803): The legislation would impose a 20-percent excise tax on tax-exempt organizations for compensation in excess of $1 million paid to any of its five highest paid employees for the tax year. (Estimated to raise $3.6 billion.)
- Unrelated Business Income Tax (UBIT) (§§ 3308, 5001-5002): The bill proposes several changes to UBIT liability. The current research exemption would be narrowed to only apply to income derived from research that is made freely available to the public. (Estimated to raise $0.7 billion.) Tax-exempt entities would be required to pay taxes on the values of providing their employees with transportation fringe benefits, and on-premises gyms and other athletic facilities, by treating the funds used to pay for such benefits as unrelated business taxable income.
- Foundation Excise Tax (§ 5101): The bill streamlines the excise tax on foundation investment income by setting a single rate of 1.4 percent instead of the current two rates of 1 percent and 2 percent. (Estimated to raise $0.5 billion.)
- Nonprofit Nonpartisanship (§ 5201): The House bill includes language to weaken the Johnson Amendment, the longstanding law that shields the entire 501(c)(3) community from the rancor of partisan politics and enables individuals of all beliefs to come together to solve community problems free from partisan divisions. Modifying the language from H.R. 781, the bill would create a giant loophole in the absolute ban on nonprofit politicking by enabling churches and integrated auxiliary organizations to endorse candidates for public office when communicating
“in the ordinary course of the organization’s regular and customary activities,” such as speaking on weekly or daily broadcasts or publishing election editions of magazines, and when spending “not more than de minimis incremental expenses,” an undefined term.
If enacted, the provision would politicize houses of worship and related charitable organizations, plunging them into the caustic partisanship that bedevils our country. Notably, the proposal would encourage creation of sham organizations, divert contributions from other nonprofits to fund partisan churches, and bring discredit to the broad charitable nonprofit community. This change to the Johnson Amendment would be contrary to the views of the vast majority of organizations that benefit from the law, as reflected in the Community Letter in Support of Nonpartisanship, signed by more than 5,500 organizations
in all 50 states, in the Faith Voices letter signed by more than 4,000 faith leaders, in the separate letter signed by more than 100 denominations and major religious organizations, and the law enforcement community, as well as polls showing that 72 percent of the public support keeping the Johnson Amendment in place and nearly 90 percent of evangelical pastors who say it is wrong for preachers to endorse candidates from the pulpit
- Child Care Tax Credit (§ 1101): The draft bill would expand the existing child care tax credit from $1,000 of the credit refundable as under current law to $1,600. It would provide a credit of $300 for each parent and non-child dependent, reportedly to help all families with everyday expenses.
- Alternative Minimum Tax (§ 2001): The tax bill would repeal the alternative minimum tax (AMT) that limits the tax benefits of certain deductions for higher-income taxpayers and is intended to ensure that those taxpayers pay at least a minimum amount of tax.
- Corporate Tax Rates (§ 3001): The bill would lower the corporate tax rate from 35 percent to 20 percent in the first year, as opposed to being phased in over a period of years. Personal services corporations would be subject to a flat 25-percent corporate tax rate. The legislation would also reduce the rate for companies such as partnerships and S corporations (known as pass-throughs) that pay their taxes on the individual side of the code, from a top rate of 39.6 percent to 25 percent.
- Donor Advised Funds (§ 5202): Under the legislation, donor advised funds would be required to disclose annually their policies on inactive donor advised funds as well as the average amount of grants made from their donor advised funds.
What’s Not in the Bill as of Now
The proposed House bill does not include a provision to repeal the employer and individual mandates to purchase health insurance, a key element of the Affordable Care Act (ACA or Obamacare). It would also leave unchanged tax incentives for workers to contribute to their retirement savings plans, such as 403(b) and 401(k) plans, although it does make some adjustments to the rules on converting between plans.
First, we swiftly prepared the foregoing to get information out to the nonprofit community so organizations can advocate during this fast-moving process. We encourage readers to check our website for any updates.
The details of tax reform are only now becoming available and many will change between now and ultimate passage in the House and Senate. It could well be that people may see unacceptable reductions in their quality of life and survivability due to a resulting limit on the ability of nonprofits to serve. This must be avoided.
This is clearly the time for nonprofits to identify the provisions in tax reform that advance or hinder their missions, and to make sure elected officials know what matters to organizations doing good work in their communities.
And now that the details of tax reform are clearer, it is natural for people to dive into the weeds to focus on who the “winners” and “losers” will be with “tax cuts.” Such a narrow focus could cause many to overlook the bigger picture: tax reform is likely to shrink federal revenues by at least $1.5 trillion that will not be available to address our nation’s needs. The nonprofit community knows better than most that spending cuts to balance budgets never cut human needs, and it is the local nonprofit to which people turn. Policymakers and nonprofits need to be
asking whether we as a nation can afford a tax reform that forces our government to make false choices between the domestic needs of our people and our common defense.