Nonprofits Hit By Federal Budget Cuts

January 1, 2006       Mark Hrywna      

As Congressional leaders continue to meet to hash out differences in spending cuts and tax provisions, a study of federal funding paints a bleak picture for nonprofits in the near future.

Two items of interest to nonprofits — a tax deduction for non-itemizers and IRA Charitable Rollover provision — were not part of a tax reconciliation bill approved by the House of Representatives on Dec. 8 by a 234-197 vote. The Senate version of the bill, (The Tax Relief Act of 2005, S. 2020) approved 64-33 on Nov. 18, included language for both items. The measure would allow a charitable deduction for both itemizers and non-itemizers for contributions more than $210 for individuals and $420 for couples, for two years, until Dec. 31, 2007. Approximately 86 million Americans, about two-thirds, file standard, non-itemized tax returns. The IRA Rollover allows tax-free distributions from IRAs for charitable purposes. Leaders from both houses will have to try to negotiate a compromise bill in conference.

The Senate version also includes provisions for extending the alternative minimum tax ( AMT) exemption while the House version keeps President Bush’s extension of tax cuts on investment income.

“Each is very, very expensive,” Gary Bass, executive director of OMB Watch said of the tax cut bills. Charitable issues are very small in terms of dollars in the legislation, he said, but also could change within the conference.

According to the National Committee on Planned Giving, House Republicans were hoping to begin a conference on the tax reconciliation measure when the Senate returned the week of Dec. 12. House Speaker Dennis Hastert (R-Ill.) announced that he will wait to select conferees until the Senate has taken up the House bill and amended it with the Senate’s own language, according to the advocacy group.

Senate Majority Leader Dr. Bill Frist, R-Tenn., said the bill likely will not be completed until next year, according to the nonprofit advocacy group, and he expects that the tax reconciliation bill will have to wait until next year as well.

“Work is under way to get to conference this week” on S. 2020, Jill Kozeny, communications director for the Senate Finance Committee said Dec. 13, while committee leaders had started meeting about conferees for S. 1932.

Spending cuts approved by both houses in recent weeks are quite different.

Under the House version (H.R. 4241), passed by a 217-215 margin, $50 billion in cuts were approved, including $11 billion to Medicaid, but none to Medicare, and about $800 million in food stamp programs. The Senate meanwhile adopted a spending bill (S. 1932) by a 52-47 vote that called for $35 billion in cuts, including $4.3 billion to Medicaid and $5 billion to Medicare.

“LSA, by and large, is pleased that the Senate bill provides help for elderly, children and families in need,” said Lisa Carr, director of public policy for Lutheran Services in America (LSA). However, the House bill is more detrimental to people in need. She said the $11 billion in House cuts to Medicaid would hurt beneficiaries by requiring cost sharing and premium increases, and the Congressional Budget Office has estimated that 100,000 people would lose Medicaid coverage altogether due to an inability to pay for the services.

LSA provides services to many sectors in the U.S., Carr said, including elderly who rely on Medicaid, children in foster care and institutional care and people with disabilities.

Whether or not either bill would be resolved in conference anytime soon remained up in the air at press time. Adam Hughes, budget policy analyst for OMB Watch, said Congress still must tackle appropriations bills and the Patriot Act, among others, making it unlikely that the tax cut bills will be settled before the end of the calendar year.

If a recent study of nonprofit funding is any indication, Fiscal Year 2006 will be just the start of a tough stretch for the sector.

Federal budget experts Alan Abramson, director of the Nonprofit Sector Research Fund at The Aspen Institute, and Lester Salamon, director of the Center for Civil Society Studies of the Institute for Policy Studies of Johns Hopkins University, released in the fall an analysis of the fiscal year 2006 through 2010 federal budgets.

The future looks bleak, according to the report, The Nonprofit Sector and the Federal Budget: Fiscal Year 2006 and Beyond. And, future federal budgets threaten “turning back the clock” from the nonprofit-supportive policies of recent years to the “fiscal stringency” of the 1980s and 1990s, according to the report.

“Federal programs of interest to nonprofit organizations — groups that often serve as the backbone of communities in times of crisis — will be cut between $40 billion and $71.5 billion over the next years,” according to The Aspen Institute.

Projected budget cuts in “programs of interest to nonprofits,” excluding health and income assistance programs, are expected to be slashed by $3.2 billion in the Fiscal Year 2006 budget, followed by $11 billion in 2007, $15.4 billion in 2008, $20.4 billion in 2009, and $21.5 billion in 2010, totaling $71.5 billion over the five years.

The experts believe private contributions would have double or triple what is expected in the coming years if the private sector was to make up the cuts. They project a growth of about $26.4 billion in private giving, approximately $45 billion short of the $71 billion cuts.

“While the proposed reductions would almost certainly increase demand for nonprofit services, they would simultaneously reduce the funding many nonprofits have available to meet even previous demands,” according to the report. “These shortfalls will leave many community groups scrambling to serve those in greatest need, particularly in times of crisis.”

Abramson said the report did not take into account the proposed charitable provisions, such as the non-itemizer deduction, and how they might affect giving, adding that it would be too early to tell without taking a serious look at specific figures. The shortfall in private giving assumed a 3 percent real growth, after inflation, he said, while the report also assumed Congress would follow through on its spending reductions.

According to the report, federal support for nonprofit organizations has grown 135 percent during the last quarter-century, from $122.6 billion in FY 1980 to $288.8 billion in FY 2005; an average increase of about 5.4 percent per year. But most of that growth was “concentrated and accrued to health care providers, especially hospitals,” and outside of that field, federal support dropped from $23.5 billion to $17 billion between 1980 and 1988; a decline of an average of 3.5 percent per year.

What increases there were to non-health-related nonprofits during the 1990s was due largely to changes in Medicaid and welfare assistance programs, the report stated, funneling support to nonprofit social service providers. NPT

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