Policy Recommendations to Increase Charitable Giving and the Number of Donors
Independent Sector, a national partner of CMF, has released a new report which provides an analysis on the potential impact of the 2017 tax reform on the charitable giving landscape, along with five specific policy options to potentially increase charitable dollars and the number of American household donors.
The report, Charitable Giving and Tax Incentives, highlights a key trend in charitable giving that CMF shared with lawmakers at Foundations on the Hill (FOTH): While there was an increase in charitable giving in 2017, the number of donors has been on the decline.
The report states, “Recent trends, including the decreasing share of American households donating to nonprofits and the passage of the 2017 Tax Cuts and Jobs Act (TCJA) have led to concerns among nonprofit organizations that the overall increases in charitable giving might not be sustainable and that the increasing concentration of giving among high-income households could lead to greater inequality.”
The effects on charitable giving from the TCJA:
The TCJA doubled the standard deduction. It is projected that 88 percent of taxpayers will take the standard deduction in the 2018 tax year.
The report shares that 28.5 million households will no longer benefit from the charitable deduction.
Researchers predict that under the current TCJA, 88.6 million households will donate $342 billion in 2021, lower than what would have been donated in charitable dollars prior to the TCJA.
The report provides five policy options that are poised to offset the trend of declining donors and potential decrease in charitable giving stemming from the TCJA.
Non-itemizer deduction: This would extend a universal charitable deduction to both itemizers and non-itemizers. The policy is estimated to increase charitable giving donations by $26.2 billion or 7.7 percent and increase the number of donor households by 7.3 million or 8.2 percent. Example of current policy under consideration: The Charitable Giving Tax Deduction Act (HR 651).
Non-itemizer deduction with a $4,000/$8,000 cap: This is similar to the previous policy but adds a cap of $4,000 for single filers and $8,000 for married couples filing jointly. The report says that including a cap is a common proposal to limit the cost to the U.S. Department of the Treasury. The policy is estimated to increase charitable giving dollars by as much as $17.4 billion or 5.1 percent and increase the number of donor households by 7 million or 7.9 percent. Example of current policy under consideration: The Universal Charitable Giving Act (HR 3988 and S2123).
Non-itemizer deduction with a modified 1 percent floor: All gifts by non-itemizers would receive a 50 percent deduction and gifts over 1 percent of their adjusted gross income (AGI) would receive the normal deduction. Researchers say this policy could increase taxpayer compliance costs and IRS administrative costs compared to the other options. The policy is estimated to increase charitable giving by $24.9 billion or 7.3 percent and increase the number of donor households by 4.6 million or 5.2 percent. However, it would reduce the Treasury’s revenue by up to $17.9 billion.
Non-refundable credit for non-itemizers, 25 percent rate: This policy would provide a 25 percent non-refundable tax credit to non-itemizers in an attempt to ensure all taxpayers receive the same benefit regardless of their marginal tax rate. This policy is estimated to increase charitable giving by $36.9 billion or 10.8 percent and increase the number of donor households by as much as 10.6 million or 12 percent.
Enhanced non-itemizer deduction: This would allow single filers earning less than $20,000 to deduct 200 percent of their charitable giving, those earning between $20,000 and $40,000 to deduct 150 percent and those earning more than $40,000 to deduct 100 percent of their charitable giving. The policy is estimated to increase charitable giving by $29.2 billion or 8.5 percent and increase the number of donor households by 8.4 million or 9.5 percent.
The report states that the policy recommendations focus on non-itemizers because they “primarily include low- and middle-income households” in order to unlock charitable giving for more Americans and not just the wealthy.
“Not only should nonprofit leaders and advocates as well as policymakers consider the effect of each policy on charitable giving dollars, the number of households that donate, and Treasury revenue but they should consider issues of donor equity and efficiency,” the report states.
In March while at FOTH, CMF asked lawmakers to support efforts that would incentivize charitable giving, either making it available above the line or through a tax credit. CMF also requested nonpartisan data on the impact of the 2017 Tax Act on charitable giving and jobs in the nonprofit sector.
The report highlights several components of the TCJA which may negatively impact foundations beyond charitable giving, such as the estate tax and unrelated business income tax (UBIT). This edition of the Weekly Download includes a deep dive on another piece of legislation connected to the TCJA – the new excise tax on executive compensation.
Read the full report.
The Impact on Talent in the Sector from New Excise Tax
At a time when funders and nonprofits may need expertise and unique insights to navigate the complex issues of our sector, a new 21 percent excise tax may affect their ability to retain and recruit high caliber talent to make such high stakes decisions.
The U.S. Department of the Treasury and the Internal Revenue Service are finalizing guidance for Notice 2019-09, which applies a 21 percent tax when an employee is earning in excess of $1 million and is “one of the tax-exempt organization’s five highest-compensated employees, including pay from related organizations.”
The tax is a component of the 2017 Tax Cuts and Jobs Act (TCJA). If liable for the tax, the tax-exempt organization, not the employee, is responsible for the tax.
The tax is applied even when an employee meeting that $1 million threshold is providing only limited service, or even volunteer service, to a tax-exempt organization.
For example, if a foundation wants to tap into the expertise of a corporate executive whose compensation is above the $1 million mark to examine issues at the foundation, the foundation could potentially be subject to this tax even if that individual is not on the foundation’s payroll.
To provide education around the impact of this tax on the sector, CMF has submitted comments to the department and the IRS.
CMF submitted this document earlier this month since all comments to the federal government around components of the 2017 Tax Cuts and Jobs Act must be submitted by June 22 for any remedies on guidance or rulemaking to be retroactive.
In CMF’s comments to the federal government, we shared an example of what this could look like for an organization.
“The chief financial officer (CFO) of a related organization also serves as a volunteer officer of the foundation of the related organization. The CFO does this in order to lend their expertise to the management of the foundation’s assets.” Even though the CFO is serving in a volunteer capacity, the tax-exempt organization could find itself paying the excise tax.
CMF shared that since the tax-exempt organization could be subject to the tax it “could result in the loss of talent and expertise provided to a tax-exempt organization by skilled employees of a related organization.”
CMF’s legal counsel, Clark Hill, PLC, has drafted a memo with more detail about the mechanics of this new tax and who it affects.
Before the department and IRS finalize the guidance, CMF is asking that the agencies consider providing clarity on when and to what extent the compensation paid to an employee of a related organization is subject to the tax.
CMF has also provided suggested regulatory language on several key points of this issue through our legal counsel Clark Hill, PLC.
Our national partner, the Council on Foundations, issued a blog post from Lindsay Mason, director of corporate philanthropy, COF, digging into the impact of this tax on corporate foundations in particular. COF additionally released a legal memo summarizing the key issues.
Efforts to Increase MI’s Earned Income Tax Credit
A broad coalition of organizations, including CMF, the Michigan League for Public Policy (MLPP) and Michigan Nonprofit Association (MNA) have expressed support for increasing Michigan’s Earned Income Tax Credit (EITC).
When it was first introduced the tax credit was at 20 percent; it was reduced to 6 percent in 2010.
Earlier this year, Governor Gretchen Whitmer shared in her state budget proposal that she recommends doubling our EITC from 6 to 12 percent to offset the impact of the proposed fuel tax.
Michigan is one of 29 states that has adopted statewide versions of the federal EITC. Those who qualify can claim from their state taxes a percentage of their federal EITC.
Data at a glance:
In 2017, more than 748,500 Michigan households received the EITC.
In 2017 that translated into an average credit of $150, infusing more than $112 million back into Michigan’s economy.
A recent study from Michigan State University found that doubling the EITC would increase the average rural filer’s application by more than $130.
At a press conference last week several organizations called on lawmakers to support the governor’s proposal.
“The EITC has a significant one-two punch for the households that receive it, and not only improves economic security, but other outcomes, as well, with kids in families that receive the EITC seeing improvements in nutrition and educational and economic attainment,” Gilda Jacobs, president and CEO of MLPP said at the event. “Now we need action to restore the state credit itself, and we urge lawmakers to work with the governor to restore our state EITC, better support Michigan’s struggling families, and unleash more of the credit’s purchasing power in local communities around the state.”
The MLPP has advocated for years to increase the EITC. Most recently, it was a recommendation in MLPP’s 2019 Kids Count in Michigan Databook, calling for an expansion of the EITC to allow young workers and adults without children to receive the credit.
In 2015, CMF supported a ballot proposal which would have increased our state’s sales tax and thereby restored Michigan’s EITC to its original 20 percent level of the federal EITC. While that did not pass, CMF joins organizations around the state in supporting an increase of the EITC to enhance support for Michigan’s working families.
Whitmer has proposed increasing the EITC over the course of two years, increasing from 6 to 10 percent in the first year and then to 12 percent in year two.
Lawmakers have until October 1 to deliberate and finalize the governor’s state budget proposal.
Kalamazoo Community Foundation selected for National Coalition for Inclusive Communities
Content excerpted and adapted from a foundation press release.
Kalamazoo Community Foundation (KZCF) is one of five community foundations nationwide recently selected for the Coalition for Inclusive Communities (CIC), a project of the Boston-based organization Community Foundations Leading Change (CFLeads).
CIC will work to advance equity in the workplace and build community cohesion. KZCF and other participating foundations will develop local employer networks to identify and promote practices that improve workplace equity.
The Economy Design Team of Truth, Racial Healing & Transformation (TRHT) Kalamazoo, hosted by KZCF, will implement this work in Kalamazoo County.
TRHT Kalamazoo is a community-based movement to bring about transformational and sustainable change to address the historic and contemporary effects of racism. Kalamazoo is one of 14 TRHT locations nationwide, and one in four in Michigan. TRHT was launched in 2016 by the W.K. Kellogg Foundation.
In this initiative, Economy Design Team of TRHT Kalamazoo’s goals include developing an equity standard certification, developing a network of employers committed to this process and creating a targeted effort to support and provide access, mentorship and resources to people of color.
"We're honored to be selected as a part of this coalition," Sholanna Lewis, a KZCF community investment officer working as TRHT Kalamazoo lead said. "Operating as an interactive learning lab, this collaborative effort will share best practices with an impact going beyond these five communities. And this work aligns nicely with our efforts to increase equity throughout Kalamazoo County and help us reach a sector that we don't often engage with in this way."
CFLeads, a national network of community foundations committed to building stronger communities through community leadership, sees community leadership as a key strategy for delivering community impact.