A preliminary tax plan released by the Trump administration Wednesday calls for doubling the standard deduction and eliminating the estate tax, changes that could have detrimental effects for charitable fundraising.
Speaking at the White House on Wednesday, Gary Cohn, the president’s chief economic adviser, said the plan also does away with a number of tax breaks that mainly benefit the wealthy.
“Home ownership, charitable giving, and retirement savings will be protected,” Mr. Cohn said, without providing details.
For individual taxpayers, the Trump plan would reduce the current seven tax brackets to three.
“We are going to double the standard deduction, so that a married couple won’t pay any taxes on the first $24,000 of income they earn,” Mr. Cohn said. “The larger standard deduction also leads to simplification because far fewer taxpayers will need to itemize.”
The Trump proposal would also eliminate the estate tax, which has long been in the sites of Republicans, who often refer to it as the “death tax.”
“The threat of being hit by the death tax leads small-business owners and farmers in this country to waste countless hours and resources on complicated estate planning to make sure their children aren’t hit with a huge tax when they die,” Mr. Cohn said. “No one wants to see their children have to sell the family business to pay an unfair tax.”
Other parts of the plan include cutting the business tax rate to 15 percent. Treasury Secretary Steven Mnuchin said the overall goal of the blueprint is to simplify the tax code and stimulate economic growth. He pledged that the administration would move “as fast as we can and get this done this year.”
Less Incentive to Give
Nonprofit leaders and tax experts noted that the plan contains few details, but some expressed relief that it keeps the deduction for charitable gifts intact. Jamie Tucker, director of public-policy strategy and operations at Independent Sector, said the Trump administration is at the very least acknowledging that it sees value in the charitable deduction even as it looks to do away with other tax breaks.
Similarly, William Daroff, senior vice president for public policy at the Jewish Federations of North America, said it was “heartening” that the plan kept the charitable deduction in place.
But some observers said raising the standard deduction and scrapping the estate tax would likely put a crimp on charitable giving. Currently, about 30 percent of taxpayers itemize, according to Joseph Rosenberg, senior research associate at the Urban-Brookings Tax Policy Center at the Urban Institute. If the standard deduction were doubled, he predicted only about 5 percent — most of them extremely wealthy — would have an incentive to itemize their spending, including that for charitable gifts. Administration officials were “making a big deal about retaining it” at a press conference Wednesday, Mr. Rosenberg said, “but very few taxpayers would actually claim the charitable deduction” under the plan.
The repeal of the estate tax, which would also largely affect wealthy Americans, might also suppress giving, he said.
While people don’t only give because they get a tax bonus, the estate tax “is a fairly significant tax incentive to leave charitable bequests,” Mr. Rosenberg said. “There will be virtually no incentive to give that money to charity if the tax is repealed.”
He noted that the elimination of the estate tax and lower income-tax rates would leave taxpayers with more money in their pockets to donate to charity. However, the impact of any such “wealth effect” of lower taxes on donations would probably be far outstripped by the reduced charitable giving incentives, he said.
Two nonprofit coalitions, the Alliance for Charitable Reform and the Charitable Giving Coalition, praised the plan for keeping the charitable deduction but called for a “universal deduction” that would let taxpayers deduct charitable gifts from their income even if they use the shortest tax form available.
‘Dim View’
The details of the tax plan, which are still to come, could present additional land mines for charity fundraisers. According to some nonprofit lobbyists, legislation being put together by the House Ways and Means Committee, chaired by Texas Republican Kevin Brady, draws heavily on a comprehensive tax bill authored by his predecessor, Republican Dave Camp of Michigan, who left Congress in 2015.
“I have to say that what we are hearing is very worrisome for charities, the charitable-giving incentives in particular,” said Steve Taylor, senior vice president and counsel for public policy at United Way Worldwide. “Some of the meetings that we have had with Ways and Means Committee members in the House have indicated that they either don’t understand or simply don’t believe what the ramifications would be of reduced charitable-giving incentives in the tax code.”
The 2014 Camp bill would have negatively affected giving in multiple ways, Mr. Taylor said. For example, taxpayers would have to give at least 2 percent of their income before they could take the charitable deduction.
“That by itself decimated giving to charities that rely on large numbers of small donations,” Mr. Taylor said.
Mr. Camp also proposed raising the standard deduction, which would have meant about 28 million taxpayers who currently itemize their deductions would no longer do so.
“That’s 28 million donors who are responsible for $94.5 billion in charitable giving [who] will no longer itemize” if Congress resurrects that provision, Mr. Taylor said. “These are donors who are critical to the support of tens of thousands of nonprofits across the country. They are not going to stop giving but they will give less.”
Some observers said raising the standard deduction and scrapping the estate tax would likely put a crimp on charitable giving.
The Camp bill “took a dim view of the exempt sector,” said Alexander Reid, a Washington tax lawyer. “It seemed like they went out of their way to ding exempt organizations.”
Mr. Reid said that in recent years some Ways and Means staff members have favored tighter rules for donor-advised funds, although recent turnover makes the committee’s perspective on those accounts less clear.
Options include a requirement that contributions to donor-advised funds be paid out to a charity within five years, that a percentage be paid out on an annual basis, or that organizations that offer donor-advised funds produce annual reports on dormant funds.
Executive Pay
Mr. Camp’s bill also would have placed an excise tax on nonprofit-executive compensation that exceeds $1 million — a provision that is unlikely to survive current tax deliberations, Mr. Reid said. However, he said Ways and Means members are likely to consider eliminating the IRS’s “rebuttable presumption” rule on salaries. Under current regulations nonprofits may pay their top executives based on the recommendations of a compensation consultant and it is up to the Internal Revenue Service to prove a salary is excessive. Mr. Reid said lawmakers would likely consider a change to this process that would make it harder for nonprofits to provide high salaries and expansive benefits.
One measure favored by charities — moving the deadline to claim a charitable deduction from the end of the year to April 15 in the next tax year — is likely to get serious consideration, Mr. Reid said.
But if Ways and Means decides to nearly double the standard deduction, a new — much higher — floor for charitable giving would render a later deadline to claim charitable deductions largely irrelevant because so few people would itemize charitable gifts.
Calling for changes in tax policy that cause pain to certain constituencies — say, particular industries, higher earners, or nonprofits — is a way to put people back on their heels during a negotiation and make smaller changes more palatable to those groups as a bill is drafted and debated, Mr. Reid said.
That seemed to be the motivation behind Mr. Camp’s tax legislation when he filed it in 2014, he said.
But he said it looks increasingly likely that the Trump administration may be angling instead for a smaller, temporary tax cut, rather than a full-scale overhaul that would require the assent of both Democrats and Republicans. With a temporary tax cut, Mr. Reid noted, it will not be as crucial to search for ways to cover the cost to the government of lower taxes, such as changing charitable provisions.
“If a bipartisan tax-reform bill is off the table and we’re going for a large, partisan temporary tax cut, a lot of the more nuanced types of changes are not likely to survive,” he said.
The Tax Policy Center’s Mr. Rosenberg agreed that unless momentum for a broad overhaul increases in Congress, many charitable provisions will not be addressed.
As small as they are compared to the size of a broad tax bill, those provisions, such as a tax on executive compensation or inactive donor-advised funds, could be used to help pay for corporate tax reductions. But Mr. Rosenberg said a comprehensive tax bill that doesn’t increase the deficit doesn’t seem to be the administration’s aim.
“We’re so far from revenue-neutral territory that it’s hard to imagine they’d want to make a bunch of enemies in order to pick up peanuts here and there,” he said.
‘You Can’t Do It’
Addressing a roomful of grant makers at the Council on Foundations conference earlier this week, Washington tax lawyer Ken Kies said it is a “virtual certainty” that no bill would be passed by the August recess.
“I hate to tell you this, but they have one person in the entire administration who has any tax-policy experience,” Mr. Kies said. “One.”
As a point of comparison, when he served as the chief of staff of the Congressional Joint Committee on Taxation from 1995 to 1998, Mr. Kies said, he had dozens of staff working for him.
“I’m just telling you, you can’t do it,” he said of passing a bill without a robust staff.
He noted that members of Congress must also attend to Obamacare and reach some sort of budget agreement.
I hate to tell you this, but they have one person in the entire administration who has any tax-policy experience.
“When Republican House members, in particular, go home for the August recess and hear all their constituents complaining, and they come back in September — as I like to say, their ‘profile in courage’ moment may be over and their willingness to vote” for partisan legislation may be severely reduced, he said.
Mr. Kies, who also served as chief Republican tax counsel to the House Ways and Means Committee during the passage of the last comprehensive tax overhaul in 1986, said he is often asked what lessons can be drawn from that experience.
“The ‘86 act has no relevance to what is happening now,” he said. “Every big tax bill has a unique DNA. And it rarely repeats itself twice. There is almost nothing similar to what is happening now that is similar to what happen in ‘86.”
Jamie Tucker of Independent Sector said one thing he will be listening carefully for is the language used by the Trump White House and Republican leaders in Congress to describe their work on changing the tax code. If they talk largely about “tax cuts,” that could be a signal that they are focused on a bill that is smaller in scope rather than a comprehensive piece of legislation.
“If they talk about tax reform more broadly, that is where we might see more of the Camp influence come into play,” Mr. Tucker said.
Editor’s note: This story has been updated to include comments by Joseph Rosenberg of the Urban-Brookings Tax Policy Center on the “wealth effect” of lower taxes on giving.
