After years of fighting the previous administration’s efforts to limit the charitable deduction, many nonprofit sector leaders have shifted to embrace the idea of a universal deduction for all taxpayers as an incentive to boost charitable giving.
As Republicans aim to simplify the tax code and enact comprehensive tax reform for the first time in a generation, Independent Sector last month launched Giving100, a campaign to make the charitable deduction universal — not just for those Americans who itemize their taxes.
The universal deduction has gone by different names at times, including the non-itemizer deduction and an “above-the line” deduction. Essentially, it would allow all taxpayers, whether they itemize or not, to take an exclusion on their charitable contributions in the same way that contributions to a traditional Individual Retirement Account (IRA) are taken above the line, before calculating Adjusted Gross Income (AGI).
Withdrawal of the Affordable Care Act (ACA) repeal is likely to expedite Congress wanting to consider tax reform, according to Steve Taylor, vice president of public policy for United Way Worldwide (UWW). Though there are a number of obstacles, it seems likely Congress will consider it sooner rather than later, he said.
Before November’s election, House Speaker Paul Ryan (R-Wisc.) and Ways and Means Committee Chairman Kevin Brady (R-Texas) put a timeline on comprehensive tax reform of introducing legislation in the spring and having it signed by President Donald Trump by August. “It’s clear to most people that timeline wasn’t realistic anymore,” said Hadar Susskind, senior vice president of government relations at the Council on Foundations (CoF).
“The wild card in this is the White House,” he said, adding that the administration has signaled it might propose its own version of tax reform.
“I don’t think anyone knows when it’s going to happen but we are in the action moment. We need to counsel and be concerned about the issues. This is a moment we need to be engaging our members and talking to elected officials, talking to the administration,” Susskind said.
“A lot of charities and foundations have been on the Hill talking to tax committee staff knowing that legislation is being written,” Taylor said. “It’s a lot easier to get favorable provisions into legislation before it’s introduced than changing bad provisions after a bill has been introduced,” he said.
“This is the most ramped up I’ve seen charities been since 2011, 2012,” Taylor said. “We’re back in that kind of range right now.” Leadership 18 has ramped up its advocacy efforts on charitable giving incentives, with CEOs scheduling meetings with key members of Congress this month, Taylor said.
Talk of increasing the standard deduction or implementing a 2-percent floor on charitable deductions has sparked the campaign for the universal deduction, which would offset anticipated drops in charitable giving.
About one-third of taxpayers typically itemize their taxes rather than take the standard deduction ($6,300). The two-thirds of taxpayers who do not itemize account for about 18 percent of charitable giving, according to the Urban-Brookings Tax Policy Center.
Increasing the standard deduction would simplify the tax code and likely reduce the number of taxpayers who itemize to about 1 in 20 rather than 1 in 3. By some estimates, that would impact about 28 million taxpayers who itemize and are responsible for almost $95 billion in charitable contributions, or about 37 percent, of all charitable giving.
A universal deduction may not necessarily be enough to drive charitable giving but at least mitigate the expected reduction that would be caused by instituting a floor and raising the standard deduction, Taylor said.
“We think the charitable community should welcome this. We think it would expand giving,” said Sean Parnell, vice president of public policy at Philanthropy Roundtable, a member of the Charitable Giving Coalition (CGC). The increase in giving could be relatively modest but important because it would be around the margins, and an increase of 3 or 4 percent in giving would be significant for the sector.
Former President Barack Obama in nearly every one of his proposed federal budgets looked to limit the charitable deduction to 28 percent on higher-income earners, intensifying advocacy efforts by charity leaders.
The impetus behind the universal deduction came out of conversations last year with the House Ways and Means Committee after release of the House Blueprint on tax reform, according to Jamie Tucker, director of public policy strategy and operations at Independent Sector. The blueprint proposed moving more taxpayers to the standard deduction, away from itemizers yet leaving a charitable deduction. “It’s important for us to come to the table with new ideas,” he said.
Charity lobbyists reiterated that incentivizing charitable giving was a priority of any tax reform. Tucker said they took at his word that Brady aims to “unlock charitable giving in tax reform.”
“Things may not be happening on the surface but conversations are happening underneath,” Tucker said, with Hill staffers actively drafting legislation and working through different pieces. The administration also has signaled the possibility of putting out its own idea, he added.
Tucker expects it will be part of the discussion whether Congress goes back to address healthcare or not, adding that the House remains optimistic about pushing out a bill this summer.
Comprehensive tax reform touches a number of issues that could affect whether it’s enacted, especially because Congress is aiming for it to be revenue- neutral. For instance, Trump’s idea of a border adjustment tax could gum up the works as Sen. Charles Grassley (R-Iowa) recently described it as a “nonstarter” in the U.S. Senate.
The goal is more charitable giving and if an increase in giving matches any decline in government revenue, almost everyone in philanthropy and government believes that’s good public policy since philanthropy is more impactful than government, dollar-for-dollar, Susskind said. “The question is determining where that line would be,” he said.
The challenge around a border tax is that’s a main revenue driver on the idea of comprehensive reform. Without a border tax, Susskind said smaller scale tax cuts reconfiguring tax rates might be another avenue for Congress, which still could be impactful.
There have been pretty strong signals from House Republicans that the estate tax will be eliminated, or at least attempted, Tucker said. Previous studies indicate that would have a significantly negative impact on charitable giving. Brady also has mentioned repeal or modification of the Johnson Amendment might coincide with a tax reform bill, he said.
The last time Congress enacted comprehensive tax reform, “The Cosby Show” was the top-rated show on television, the 256kb Apple IIGS was released, and Hands Across America had raised some $34 million to fight poverty. And it’s been 100 years since the tax code was changed to allow taxpayers to write off their gifts to charity.
There have been efforts since the Tax Reform Act of 1986, most recently in 2014 by former Congressman Dave Camp’s (R-Mich.) proposal for comprehensive tax reform. Now that Republicans control Congress and the White House, they’re keen on overhauling the system and simplifying the tax code, which could include changes to charitable giving incentives.
“We think there’s still some likelihood that’s going to happen,” Parnell said. While there’s always a level of uncertainty in D.C., he’s still confident that something will happen on comprehensive tax reform in this congressional session, possibly by the end of the year.