Charities are worried that donations might drop in the wake of President Trump’s much-promised overhaul of the tax code, which could dampen donations even if Congress charts a far less ambitious course.
With Republicans in control of both chambers of Congress and the White House, GOP lawmakers were confident early this year that they would send legislation to President Trump by the end of the summer.
But now tax changes could have to wait until next year, and instead of a broad overhaul, some tax experts think a narrow bill that temporarily cuts income-tax rates is more realistic. That means fewer new rules or giving incentives aimed specifically at charities, foundations, and their supporters.
“It’s possible that at the end of the day we just end up with a big tax-cut package,” said Jeff Hamond, a tax lawyer and former economic policy director for Sen. Chuck Schumer, the Democratic leader in the Senate. “It’s very hard to see how a big comprehensive reform comes together.”
Cutting Incentives
If Congress does vote to lower tax rates, it’s not clear how charities would be affected. But if the highest tax rate was, say, 20 percent, donors would, in effect, save $20 on every $100 gift by taking a tax deduction. Today, with the highest rate near 40 percent, that same donor essentially saves almost $40.
While most economists and other experts say that reduction in tax savings will discourage donors from giving, others believe that because the overall tax cuts leave people with more money, they will be more willing to donate.
Given the uncertainty over the timing and scope of a tax bill, nonprofit leaders should make their concerns about the impact of cuts known before congressional leaders start drafting legislation, said Alex Reid, a tax lawyer and former aide to Congress’s Joint Committee on Taxation. “This is the moment when members’ individual objections to anything in the bill will be heard,” he said. “Charities that have the ear of a member should bend that ear now.”
Hearings Under Way
The process of drafting a tax bill got under way in earnest in mid-May, when House Ways and Means Committee Chairman Kevin Brady held a hearing on tax-policy ideas. He kicked off debate with a tax plan released last year, and the Trump administration followed up with a one-page policy plan in April. Some nonprofit advocates think it’s still possible Congress will craft a once-in-a-generation overhaul this year.
“We have heard about every possible permutation and option when it comes to tax reform,” said Allison Grayson, director of policy development at Independent Sector. “But we know that at least right now, publicly, Chairman Brady is committed to comprehensive reform, and that is how they are going to proceed.”
Ms. Grayson acknowledges Congress could ditch big tax plans to focus on a bill that temporarily reduces the income tax. That still worries her and other nonprofit advocates because of the potential for a slimmed-down bill to include a provision found in the House and White House plans to double the standard deduction.
Such a move would make it financially wise for many more Americans to avoid itemizing their taxes, which means they would see no tax benefit in their charitable gifts. That said, the wealthiest Americans — those who account for a sizable portion of charitable giving every year — would still have financial incentives to itemize, but the impact of the lower rates could be a deterrent for them.
To counter the impact on gifts from low-income and middle-class people, Independent Sector and other nonprofit advocates are urging Congress to allow people to claim charitable gifts on their tax forms even if they don’t itemize. That change would provide charities with as much as $12 billion more in donations every year, but the idea faces a steep climb in Congress because the federal Treasury could exceed $13 billion, according to a recent study commissioned by Independent Sector
Ms. Grayson says for now Independent Sector is focused mainly on making sure members of Congress know what impact changes in the tax code, even those unrelated to charitable giving, could have on nonprofits.
“We don’t want to be caught off guard,” she said, “so that’s why we want to inform the conversation on the front end.”
Struggles to Pass the Bill
The reason a comprehensive tax overhaul now seems far from certain is that splits among congressional Republicans were already deep, and other legislative priorities, such as an attempt to repeal Obamacare, have run into snags. What’s more, stumbles by the Trump White House in recent weeks have added to the struggle to pass bipartisan legislation.
As a result, congressional Republicans may decide to pass a bill in a process known as reconciliation, which would require a simple majority in the Senate rather than 60 votes. A reconciliation bill, however, cannot increase the deficit over the long term, so passing a bill through that process would require a tax cut to include revenue to pay for it.
One way to get around that is to make the tax cuts temporary. But that doesn’t mean the bill would be limited to lowering income-tax rates, according to Scott Greenberg, an analyst at the Tax Foundation. It could still increase the standard deduction to provide a tax benefit to low-income and middle-class taxpayers.
A Persistent Impact
While economists don’t have a full consensus on the impact of lower rates, most think they will hurt charities. According to the study commissioned by Independent Sector, which was conducted by the Indiana University Lilly Family School of Philanthropy, lowering the top tax rate from 39.6 percent to 35 percent would reduce charitable giving by 0.75 percent, or $2.1 billion annually.
“This would have a persistent, long-term impact on giving, said Patrick Rooney, associate dean for research at the school. Mr. Rooney said the calculations were made assuming historic rates of growth. If the nation’s gross domestic product grew faster, as President Trump has promised it would, it is possible that a greater “wealth effect” could increase giving, even with lower tax rates, Mr. Rooney said.
Jon Bakija, an economics professor at Williams College who has studied the effect of tax policy on charitable giving, said if donors anticipate lower taxes, they may step up their donations before the changes go into effect so they can lock in lucrative tax write-offs. But once the lower taxes go into effect, donors are unlikely to give more simply because they have paid less in taxes.
“They may spend some of their extra income on charity, but on net, there will some decline in charitable giving, he predicted, adding that his forecast was not based on a specific proposed change in tax policy.
Correction: A previous version of this article said that allowing people to claim charitable deductions on their tax returns even if they don’t itemize would result in $13 billion (instead of $12 billion) more in donations every year, according to a study, but would cost the Treasury more than $12 billion (instead of $13 billion).
