As the momentum grows for Congress to take up a major tax measure, nonprofit leaders are trying to make sure lawmakers hear their concerns about keeping incentives for giving. At the same time, two influential scholars are also urging Congress to find other ways to make sure more private money flows to charity — largely by forcing fast-growing donor-advised funds to distribute a set amount of funds.
Nobody is ready to predict whether Congress will really take on taxes anytime soon, but the next few weeks are considered pivotal if lawmakers hope to complete a measure before the 2018 campaign season begins.
The latest indication of what direction policy makers will take came shortly before they left Washington, when congressional leaders and White House officials issued a joint statement on taxes. There was no mention of the treatment of charitable giving in the slim, two-page document, but that didn’t mean charities won’t be affected. One sign of that: Lawmakers said they wouldn’t include a border-adjustment tax, a levy on imported goods that could generate an estimated $1.2 trillion in revenue over 10 years.
If lawmakers follow that course, they will have to hunt for other ways to fill that trillion-dollar hole — including possible changes in the rules on charity tax breaks. “I doubt anyone in the nonprofit sector has a position one way or another on the border-adjustment tax,” said Steve Taylor, senior vice president at United Way Worldwide. “But the fact it is no longer in play does increase pressure on charitable-giving incentives.”
Expanding the Deduction
Last year in preparation for a full-blown tax debate, House leaders outlined a plan that preserved the tax deduction for charitable giving. But to provide broad tax relief, their blueprint would nearly double the standard deduction that everyone is eligible to take to avoid itemizing their returns. By doing so, lawmakers predicted about 95 percent of taxpayers would claim the standard deduction rather than itemize, essentially stripping the charitable deduction of its ability to prod most Americans to be generous.
In response, charity leaders last month took a message to Vice President Pence and key lawmakers: Keep the higher standard deduction, they said. But to ensure the charitable deduction still packs a punch, allow everyone to take a deduction for charitable gifts, regardless of whether they itemize.
While the idea of extending charity tax breaks to every American has strong populist appeal, it probably will not be an easy sell — especially as lawmakers seek ways to ensure a new tax code brings in just as much money to the Treasury as the current one.
Expanding the charitable deduction has a $13 billion annual price tag in terms of lost tax revenue, according to a study by the Lilly Family School at Indiana University, which was commissioned by Independent Sector, a membership organization of nonprofits.
The extra giving charities could expect: $12 billion a year, a relatively small sum compared with the more than nearly $282 billion raised from individuals last year, according to “Giving USA.”
But those numbers may not show the full extent of the loss of tax revenue.
Another study, conducted last year by the Urban Institute, found a slightly less rosy picture. Absent any other changes in tax policy, extending the charitable deduction would cost $134 billion in lost federal revenue over 10 years.
But when coupled with other aspects of the House tax plan currently in play, such as a reduction of income-tax rates, expanding the deduction could be more costly. Researchers at the Lilly school peg its 10-year cost at $215 billion. And researchers at the Tax Foundation, a policy-research organization, estimated it would cost $515 billion over the same time period, using slightly different assumptions on what a final tax measure looks like.
Floors or Caps
If lawmakers are desperate to find ways to pay for tax cuts, nonprofit advocates worry they’ll end up devising ideas that don’t take into account how policy changes will affect charitable giving.
One way to limit the expense is to cap the dollar amount of charitable and other deductions people can claim or to allow only gifts above a certain percentage of a person’s income to qualify for a deduction. Former President Obama unsuccessfully pushed for a cap on all tax deductions during his tenure. And President Trump during his campaign called for a lid on charitable deductions. The idea of a floor — a minimum of income that must be donated to qualify — has been discussed for years but is not currently part of the House plan.
Jamie Tucker, director of public-policy strategy at Independent Sector, fears that lawmakers will resurrect both options.
“It’s something we understand could come back,” he said. “The specter of floors or caps is a concern.”
An income threshold for charitable deductions would hit nonprofits that rely on small and middle-income donors especially hard, including national organizations, said the United Way’s Mr. Taylor.
On average, the 7.2 million people who give to United Way through on-the-job campaigns contribute about $154 a year. Nonprofits need to show members of Congress that changes in the tax code can put risk human-service nonprofits’ ability to function at risk, Mr. Taylor says.
“Once Congress understands that a floor knocks out deductions for donations made from working-class donors who are scraping by and giving whatever they can, that will persuade Congress to step back from the idea of a floor,” he predicted.
Failure to Spur Giving
When lawmakers return to Washington next month, many charity policy experts believe they will incorporate into current deliberations aspects of the last effort at a major tax overhaul. That attempt, a bill drafted three years ago by then House Ways and Means Chairman David Camp, contained many provisions hotly debated by charities, including a cap on executive compensation, restrictions on how to value appreciated assets donated to charity, and a requirement that donor-advised-fund account holders direct their money to charity within five years.
If Congress turns to Mr. Camp’s draft, two law professors who have pushed for a donor-advised-fund payout requirement, Ray Madoff of Boston College and Roger Colinvaux of the Catholic University of America, see an opportunity to press their point.
In a letter last month to Sen. Orrin Hatch, the Utah Republican who chairs the Senate Finance Committee, Ms. Madoff and Mr. Colinvaux wrote that the failure of donor-advised funds to spur more giving suggests people are stockpiling assets in their accounts rather than directing them to charity. They noted that even as the funds have grown rapidly and are now worth some $80 billion, according to some estimates, the overall giving rate in America has not budged beyond 2 percent of disposable income.
“Given the substantial sums flowing into DAFs, the significant tax benefits allowed for these contributions, and the ultimate purpose of charitable tax benefits to get money to organizations engaged in charitable work, we believe that Congress should impose a maximum time period,” Mr. Colinvaux and Ms. Madoff wrote. The two professors did not call for a specific time limit, but suggested that 10 years would be “reasonable.”
A Call to Slow Down
Community foundations, many of which offer donor-advised funds, have aggressively pushed back against the idea of a mandated payout.
Jeff Hamond, a former Senate aide who directs the Community Foundation Public Awareness Initiative, a coalition of foundations, has coordinated a letter-writing campaign from community-foundation leaders across the country to drive the message that the donor-advised funds they oversee usually go to needy charities in a tight time frame.
“Our concern is we don’t want to change the rules for 100 percent of donor-advised funds to get at a problem that a very small percentage of funds exhibit,” he said.
Steve Maislin, president of the Greater Houston Community Foundation was one of several dozen community-foundation leaders to cosign a letter to Texas representatives.
His main message to them: Take your time.
He fears lawmakers will rush to close a deal on the broad parameters of a comprehensive tax deal without taking into consideration how nonprofits will fare.
“When momentum builds up and there’s a focus on bigger-picture issues, there’s not always an incentive to slow down and make sure there aren’t any unintended consequences,” he said in an interview. “Sometimes our part is less visible and significant, but whatever direction they go, we want them to consider what the impact will be on charitable giving.”
Correction: An earlier version of this article mistakenly said that Jeff Hamond is a lawyer.
