The tax plan introduced by House Republicans this week could make life more difficult for nonprofits, with some experts suggesting that annual charitable giving could fall by as much as $14 billion, the Chronicle of Philanthropy reports.
While the plan would preserve the charitable deduction, it also would nearly double the standard deduction for taxpayers, which if enacted could reduce by millions the number of Americans who itemize their deductions. Nonprofit leaders have long argued that such a move would negatively affect the amount and level of giving. Indeed, nonprofit groups have been working for months with lawmakers to mitigate the effect of an increase in the standard deduction by allowing all Americans, not just those who itemize their returns, to deduct charitable gifts from their taxable income. "This is a glaring, glaring negative," Hadar Susskind, senior vice president of government relations at the Council on Foundations, told the Chronicle. "It's a huge miss."
The House bill also would make fewer wealthy people subject to the estate tax, a change that could eliminate an important incentive for high-net-worth individuals looking to reduce their tax burden with gifts to large nonprofit institutions and foundations. Under the proposal, the estate tax would be phased out in six years. "The bill is a pretty fundamental shift," said Independent Sector CEO Dan Cardinali. "It turns the charitable deduction into a tax benefit that overly privileges the wealthy and disincentivizes the common citizen from being an integral part of a community solution."
The proposal also would change the rules on how much tax foundations pay on their investments. Currently, excise taxes on foundation investment income are applied on a two-tier basis, where private foundations are taxed at 2 percent on that income unless they make grants exceeding their average payout amount over five years, which qualifies them for a 1 percent rate. The proposed 1.4 percent rate in the House Republican plan is higher than foundation leaders would like, but it would alleviate concerns about foundations making grantmaking decisions based on their desire to qualify for the lower tax rate rather than the needs of grantees.
"I get concerned that it could be expanded to other types of charitable organizations," said Ruth Madrigal, a partner at the Washington law firm Steptoe & Johnson who works with a broad range of nonprofits, of the change. "And if you're starting to tax the investment income of charities, what does tax-exempt even mean?...These are organizations that have some streams of revenue, investment income being a significant one, because donors have given assets that are intended to be used in perpetuity for charitable purposes."