House Republicans Release Tax Reform Blueprint
House Republicans released the outline of their tax reform priorities that are intended to shape the debate for congressional elections. The framework calls for eliminating all deductions except the charitable and mortgage interest deductions, and replacing the basic standard deduction with a larger deduction of $24,000 for a couple, $18,000 for a single parent with a child, and $12,000 for an individual. The “Blueprint” promises that “The Committee on Ways and Means will develop options to ensure the tax code continues to encourage donations, while simplifying compliance and record-keeping and making the tax benefit effective and efficient.” The document estimates the new deduction would reduce the number of people who itemize their deductions to nearly 5 percent of tax filers, down from the current one-third. Consistent with past tax proposals, the Republican plan urges repeal of the federal estate tax. The outline proposes reducing the current seven individual brackets into three: 33 percent being the top rate, 25 percent, and 12 percent. Previous efforts had called for a top rate of 25 percent. The plan also proposes expanding the child tax credit to $1,500, of which $1,000 would be refundable. Other than public hearings, the priorities outlined last week are not expected to see legislative action this year.
- Donor Non-Disclosure: The House passed the Preventing IRS Abuse and Protecting Free Speech Act (H.R. 5053), a bill to prohibit the Secretary of Treasury from requiring tax-exempt organizations to disclose donor and contribution information. It would limit the donor information most nonprofits would need to include on Schedule B of Form 990 to contributions of $5,000 or more from an organization's officers, directors, or five highest compensated employees, and information that the Internal Revenue Service collects related to prohibited tax shelter transactions. Although the intent of the bill reportedly is to reduce transparency of contributors to 501(c)(4) social welfare organizations that are used for partisan political purposes, the donor reporting changes would also apply to 501(c)(3) nonprofits. The bill now heads to the Senate, where it is expected to run into sharper opposition to shielding the identify of major contributors of “dark money” to partisan political campaigns.
- Social Impact Partnerships: The House passed by voice vote a bill to promote social impact partnerships (H.R. 5170) that often involve “pay for success” components. The legislation would instruct the Treasury Department to request proposals from states or local governments for projects that focus on employment for the unemployed between ages 16 and 24, high school graduation, or reduction of teen and unplanned pregnancies as well as incidences and adverse consequences of child abuse and neglect. The program would reserve funds to assist state or local governments with up to 50 percent of the costs of developing feasibility studies to apply for social impact partnership funding and would require an independent evaluation to determine whether the state or local government project has met an outcome specified in the agreement in order for such governments to receive outcome payments. The bill now goes to the Senate.
- Deferred Compensation Rules: The Internal Revenue Service issued proposed regulations on June 21 for determining when compensation from tax-exempt organizations is considered part of a Section 457 deferred compensation plan and when it vests. Grant Thornton explains in a summary that the proposed rule would clarify that compensation amounts determined to be inside a Section 457(f) plan “are subject to income tax when they vest, while compensation outside of these plans is generally not subject to income tax until it is actually received by the employee.” The regulations are open to public comments through September 20, 2016.
Mixed News on State Budgets
Whether state budget dramas are ebbing or increasing depends on many factors, ranging from location, status of key industries, and more. Overall, state general fund spending grew by 5.5 percent and will finally surpass pre-recession peaks, according to a new study from the National Association of State Budget Officers. This seemingly positive news was dampened by the fact that half the states still have not reached 2008 spending levels. Moreover, the report projects that spending will likely slow to 2.5 percent in the next fiscal year, and that revenue growth is expected to slow as well.
Lawmakers are responding to the volatile budget projections by cutting programs that affect the people served by charitable nonprofits. In Oklahoma, which saw its revenue hit a six-year low last month, lawmakers addressed the fiscal crisis by voting to curtail part of the state’s earned income tax credit for the working poor. Wyoming budget cuts of nearly $250 million will result in the loss of over 650 healthcare jobs. Alaska legislators, who have been resisting the Governor’s call for a state income tax and new business taxes, have been called in for a second special session to address $4 billion deficit caused largely by low oil prices. Budget cuts in Connecticut have forced the closure of some juvenile courts, as well as a series of community-based programs, including one that helped hundreds of at-risk teenagers and juvenile offenders return to, or catch up in, school.
Charitable Giving Incentive Advances in New Jersey
The New Jersey Legislature is poised to approve bi-partisan legislation that would establish for the first time a non-itemizer deduction on state income taxes. The measure would apply to contributions to New Jersey safety net organizations that are eligible to participate in the New Jersey State Employees Charitable Campaign (NJSECC), the workplace giving program for New Jersey state employees. Currently only 1,100 New Jersey-based organizations participate in the NJSECC, but new charities would be allowed to apply and, if accepted, be eligible for the state tax-deductible contributions under the bill. The charitable deduction is part of a larger package of tax and budget measures that includes a hike in the state Earned Income Tax Credit, a phase-out of the state estate tax, an increase in the taxable threshold for retirement and pension income, and increases to certain taxes on petroleum products. See the analysis by the Center for Non-Profits in New Jersey.
Louisiana Set to Restore Nonprofit Tax Exemptions
The Louisiana Senate and House approved a bill last week that would restore numerous tax exemptions and exclusions that were temporarily suspended earlier in the year, including exemptions for tickets to elementary and high school athletic and entertainment events, sales and donations to food banks, food sales by youth serving organizations (such as Girl Scouts), and membership fees or dues of nonprofit civic organizations (including the YMCA and YWCA). These and many other tax breaks were suspended in March in an effort to raise revenues very quickly to satisfy the state’s constitutional mandate of ending a fiscal year (June 30 in this case) in the black. In exchange for the restored exemptions/exclusions, a separate bill would require affected nonprofits to file an annual report listing those items that were exempted. The Governor is expected to sign the bills this week.
North Carolina Considers Form of Colorado TABOR Restrictions
The North Carolina Senate is expected to vote soon on a bill that would place a constitutional amendment on the November ballot that would limit the state income tax rate to 5.5 percent. The individual income tax, which is currently 5.75 percent, will drop to 5.499 percent next year. This is similar to a provision in the Taxpayer Protection Act, a form of “taxpayer bill of rights” or TABOR, that passed the State Senate last year. The NC Center for Nonprofits is concerned that this type of constitutional amendment would likely have unintended consequences for nonprofits by limiting the state’s revenue from income taxes, potentially resulting in the elimination of nonprofit tax exemption, limits on the state charitable deduction, reductions in state grants and contracts with nonprofits, and loss of local government revenue, which could force counties and cities to impose new fees and payments in lieu of taxes on nonprofits. In TABOR related news, a federal court of appeals ruled recently that Colorado lawmakers do not have standing to challenge the Colorado Taxpayer Bill of Rights constitutional amendment that requires a public vote for any tax increases, ties year-to-year spending increases to inflation and population growth, and mandates that revenue be refunded to taxpayers under certain circumstances.
Taxes, Fees, PILOTs
- Property Taxes: Legislation in New Jersey would prohibit private citizens from filing lawsuits challenging the property tax exemption of nonprofits. Last year, two dozen local taxpayers brought suit against Princeton University asserting that the university should no longer be considered a charitable nonprofit eligible for tax exemption. They are suing the local government as well for failing to enforce the law. The broader nonprofit community strongly supports the new legislation because of concerns that current law empowers disgruntled residents to harass organizations with missions they oppose, such as reproductive health or environmental concerns.
- Sales Taxes: Claiming to correct a 15-year oversight, the city of Bethel, Alaska sent word that charitable nonprofits must now start paying sales taxes. Local officials had not been enforcing a 2001 ordinance that only exempts nonprofits that receive Alaska Revenue Sharing, a program that does not exist. The leader of the Tundra Women’s Coalition said the tax will force the group to “make really difficult decisions” to cover the expected cost of between $15,000 and $16,000, such as having to “choose between fixing something in our building versus providing travel for somebody to leave a domestic violence situation or food for the pantry.”
- PILOTs: Nonprofits and others came out in force to denounce an Onalaska, Wisconsin proposal to require charitable organizations to make payments in lieu of taxes (PILOTs) to fund city services and reduce property tax rates for others. City officials reportedly had become concerned that local churches were operating day-care centers without securing “conditional-use permits.” A proposed ordinance calls for a PILOT agreement whenever a nonprofit organization buys taxable land and converts it to tax-exempt status, or when a nonprofit builds on or alters its structure in a way that requires a conditional-use permit or a variance from the city.
Government-Nonprofit Contracting Reform
New York City Department Agrees to Implement Indirect Cost Mandate
New York City’s Department of Youth and Community Development (DYCD) reportedly has indicated that it will honor the federal negotiated indirect cost rates of organizations that receive awards under the In-school Youth and Out-of-school Youth request for proposals (RFP). This small, but significant step toward implementation of the OMB Uniform Guidance came about through the intervention of the Lawyers Alliance for New York and other nonprofits that determined that, contrary to federal grants policy, the DYCD announced in an RFP that it would only reimburse a nonprofit for 10 percent of its indirect costs. The Lawyers Alliance prepared a letter to the Department citing the requirement that federally approved indirect cost rates must be used as the reimbursement rate for nonprofits that have them. The City agreed to correct its error.
Nonprofit Independence Preserved in Refugee Dispute in Texas
Ruling that Texas did not have grounds to sue the federal government over immigration policy and failed to provide a “plausible claim” that a refugee resettlement nonprofit breached its contract, a federal judge threw out a lawsuit filed by the Governor seeking to keep Syrian refugees out of the state. The case is part of efforts in more than half the states starting last year to block the relocation of Syrian and other refugees, arising out of claimed security concerns following the Paris terrorist attacks. Numerous nonprofits were ordered by states not to accept refugees and thus to violate their contracts with the federal government. At the end of last year, the federal government informed many nonprofits that the actions and objections of the governors are not controlling, stating "States may not deny (Office of Refugee Resettlement)-funded benefits and services to refugees based on a refugee's country of origin or religious affiliation.” The decision on the Texas challenge may put to rest this challenge to nonprofit independence.
Keeping it Personal, Keeping it Positive
Delaware lawmakers, it appears, respond favorably to nonprofit stories of successful outcomes. And that is why the Delaware Alliance for Nonprofit Advancement (DANA) is encouraging nonprofits to step up their advocacy efforts as the legislative budget season comes to a close.
In a recent posting on “John’s Public Policy Blog,” DANA’s John Baker provides the lay of the land and gives clear directions on what nonprofits in the “First State” need to do to ensure their legislative priorities are achieved. He recognizes that “Many of you have sent us powerful images and stories that we’ve been able to get out to our public officials over social media.” The social media campaign trumpeting successes continues to roll through Delaware: #OurDelaware #PartnersInAstrongerDelaware John’s simple message now: “Keep them coming!”
Advocacy efforts earlier in the year convinced key policymakers that across-the-board spending cuts are harmful to the people nonprofits serve. The co-chair of a key committee sent word to DANA members that she is “opposed to across-the-board cuts,” but alerted nonprofits that legislators “will need to make further difficult decisions in order to achieve a constitutionally mandated balanced budget by the end of June.”
This message triggered several advocacy recommendations from John Baker. “It’s that much more important for you and your boards, staff, and clients to reach out to [legislators] and make certain they know your great outcomes [emphasis added].” Based on experience in developing a nonprofit-friendly legislature (or at least one that respects the work of nonprofits), John suggests that nonprofits “carefully craft a brief message for DANA to use in emails and phone messages, in 3 or 4 sentence talking points, that state how you make your clients’ lives better.”
The legislative arena is known as a place for the rough and tumble and is often referred to as a “contact sport.” Anger and outrage alone, however, are not always the best approaches to solve policy challenges, as our colleagues in Delaware are demonstrating.