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Update on Tax Reform

Wednesday, December 13, 2017

Dear Colleagues,

We are pleased to share with all of SCG’s membership a “special edition” of our Public Policy Roundup given the importance of federal tax legislation on our sector. In fact, the Congressional conference committee held its first (and only) public hearing today on tax legislation passed by the House and Senate, and a tentative deal has been reached by Senate and House leaders. Below we provide a high-level summary of the impacts of the proposed tax legislation, which SCG has been monitoring since the beginning of the year.

Internal Revenue Service rules permit foundations—both public and private—to lobby on the tax legislation as it falls under the “self-defense” exemption. If, after reading this message, you feel compelled to act, and you have questions about next steps, please feel free to contact Seyron Foo, SCG’s Director of Public Policy and Government Relations, at (213) 680-8866 ext. 221 or [email protected].

If you are interested in additional public policy conversations, we encourage you to sign up for our robust monthly Public Policy Roundup, a benefit of SCG membership. SCG members, please log in to see the latest Round Up.
 

Jump to:  Where Are We On Tax Reform?  / How Does Tax Reform Affect Philanthropy’s Work?
What Is Philanthropy’s Position on Tax Reform? / Are There Other Items of Interest?

 

WHERE ARE WE ON TAX REFORM?

The tax bill discussions have moved into the conference committee because the House and Senate passed different versions of the tax reform bill. You can view the Tax Policy Center and Tax Foundation comparisons of current law, the Senate bill, and the House legislation here and here, respectively.

We learned today that Senate and House leaders have a conceptual agreement related to lowering the corporate tax rate from 35 percent to 21 percent, lowering the top income tax income credit to 37 percent, retaining most of the benefit mortgage deduction, and retaining income tax deduction for the State and Local Tax (SALT) for up to $10,000. It is unclear where the estate tax repeal stands. The House version repeals the estate tax in its entirety in 2024, while the Senate version sunsets the doubling of the estate exemption to $11.2 million ($22.4 million for couples).

The Johnson Amendment, a provision in the U.S. tax code that prohibits all 501(c)(3) non-profit organizations from endorsing or opposing political candidates, is also a point of difference—and one on which Philanthropy California—an alliance of Northern California Grantmakers, Southern California Grantmakers, and San Diego Grantmakers—has been active. The House included a provision in its version that would weaken the Johnson Amendment, eroding nonprofit nonpartisanship (for more, see below).

The timeline for a final agreement to emerge remains uncertain, though it is likely that the vote will occur next week. However, as we have witnessed with most high-profile legislation this year, timelines are ever-shifting in the Capitol.

The funding of government operations could be a potential hiccup to the above timeline. Last week, Congress passed a Continuing Resolution to keep the government “open” for two more weeks, setting themselves up for a pre-Christmas discussion on another Continuing Resolution. Issues that remain unresolved—with some votes on tax reform being tied to these outcomes—include a solution to the President’s decision to end the Deferred Action for Childhood Arrivals (DACA) program and stabilization of the health insurance markets.

HOW DOES TAX REFORM AFFECT PHILANTHROPY’S WORK?

The outcome of the tax reform bill could affect philanthropy in the following ways:

  • Reduces charitable giving: Proposed changes to the tax code, specifically the increase in the standard deduction, would reduce giving by $14-$27 billion, according to studies by the Tax Policy Center and American Enterprise Institute, among others. This amounts to almost 7 percent of annual giving in 2016.
     
  • Initiates cuts to social services: Tax reform will add at least $1 trillion to the national debt, according to Congress’s nonpartisan Joint Committee on Taxation’s (JCT) analysis, inclusive of the projected economic growth spurred by the tax cuts. The Congressional Budget Office, another Congressional nonpartisan office, estimates $1.5 trillion in deficits over the next ten years. Consequently, under existing Congressional rules to control deficits known as “pay-as-you-go” (Paygo, in DC jargon), automatic cuts would occur if Congress does not offset the deficit with outlined cuts or revenue increases. This includes $25 billion in cuts to Medicare and $1.7 billion for programs related to foster care, Meals on Wheels, and other social services. A complete list of automatic cuts can be found here
     
  • Repeals Johnson Amendment, exposing nonprofits to politicking: The House version of the tax bill contains a partial repeal of the Johnson Amendment. The House’s proposed change would also make political donations—for the first time ever—tax-deductible when funneled through charitable nonprofits, houses of worship, and foundations.  
     
  • Establishes a flat excise tax for private foundations: The House bill would establish a flat rate of 1.4 percent on the net investment income of private foundations. The Senate does not make changes to the private foundation excise tax. Currently, private foundations must grapple with a two-tiered tax rate – one at 2 percent and another at 1 percent, depending on the foundation’s grantmaking in a given year relative to the average payout from the previous five years.

 

WHAT IS PHILANTHROPY’S POSITION ON TAX REFORM?

SCG has been working through our partners on tax reform, particularly related to the Johnson Amendment. Since our March trip to Washington, DC as a part of Foundations on the Hill, we have been consistent in our message that the repeal of the Johnson Amendment would have would have harmful effects to the sector.

Additionally, SCG has been working through our partners, including the United Philanthropy Forum, on the larger tax reform efforts on the “universal charitable deduction” to offset the changes to the tax code. The Council on Foundations and Independent Sector have also been actively involved in Washington. The universal charitable deduction is an above-the-line deduction on charitable giving regardless of whether an individual elects to take a standard deduction or to itemize. We see a potential effort to bring this forward again given Congress’s renewed focus on potential changes to Medicare, Medicaid, Social Security, and other social safety net programs in 2018.
 

ARE THERE OTHER ITEMS OF INTEREST?

The tax proposals touch every aspect of the work you, our members, do in your mission to make the world a better place. Here are a few more items of potential interest, relevant to our work in Southern California:

  • Affordable Housing: The House proposal eliminates tax-exempt bonds, known as private-activity bonds, and the low-income housing tax credit (LIHTC). Affordable housing developers frequently use both tools to finance the construction of affordable housing. A report by Novogradac estimated a loss of 1 million rental units as a result of the proposal.

    In California, private activity bonds accounted for $17.7 billion for affordable and senior housing, $19.3 billion for hospitals and healthcare, $4.1 billion colleges and universities, $700 million for museums and cultural institutions, and $2.6 billion for K-12 schools since 2008, according to State Treasurer John Chiang.

    LIHTC accounts for an estimated $250 million, the largest source of funding for low-income housing in California. LIHTC has financed nearly 3 million rental units nationwide.
     

  • Deduction for Natural Disasters: The House plan eliminates the deduction for losses incurred during a national disaster, including the wildfires affecting Southern California. Interestingly, the House bill provides an exemption for the victims of the recent hurricanes affecting the Gulf Coast.
     
  • State and Local Tax (SALT) Deduction: Existing federal law allows for the deduction of tax payments to state and local governments for those who itemize. More than six million Californians used this deduction to the benefit of $112.5 billion. Today’s tentative agreement would limit the state and local tax deduction to a maximum of $10,000 for both real estate and income. Limit of this deduction would increase tax payments for some Californians.

SCG will continue to work with our national partners on this crucial legislation affecting our tax sector. Since last week, we have been calling Members of the House of Representative in Southern California to voice our concerns about the weakening of the Johnson Amendment. Given where conversations related to tax reform are heading on the Hill and where we believe SCG can most strategically exert influence, we have focused our advocacy energies on this issue.

Please do not hesitate to reach out to me. Tax reform will profoundly affect our work, and I look forward to our continued partnership in advancing philanthropy’s work.

Christine Essel
President and CEO
Southern California Grantmakers
@Christine_Essel

 

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