Tax reform is now in full swing with legislation having been unveiled in both houses of Congress and the Ways and Means Committee advancing the House version for consideration on the floor of the House. We provide all the details below.
The House Ways and Means Committee completed the amendment process (known as a “markup”) of the Republican tax reform bill, H.R. 1, the Tax Cuts and Jobs Act, this week. The bill was passed with by a party line vote of 24-16.
Here’s what made it into the bill that passed the Committee with JCT scores:
- Standard deduction is doubled and charitable deduction is preserved.
- Increases the AGI limitation on cash contributions to public charities and certain private foundations to 60 percent from its current 50 percent. (-$2.8B/year, includes other provisions in cost noted below)
- Repealed the Johnson Amendment which permits ALL 501(c)(3) organizations to engage in political activity, but only for 5 years.
- Streamlines the PF excise tax to a flat 1.4 percent. (+$50M/year)
- Requires DAF sponsoring orgs to disclose their policies for inactive funds, as well as the average amount of grants made from their DAFs. (No revenue impact)
- Repeals the Pease Limitation, which puts a limit on all itemized deductions, including charitable, for high-income earners. (No score associated)
- Impose a 1.4 percent excise tax on net investment income of private colleges and universities whose assets are valued of at least $250,000 per full-time student. (+$250M/year)
- Doubles the estate tax and generation-skipping tax exemption to $10 million, and repeals both after six years. (-$17B/year)
- Adjusts the charitable mileage rate for inflation. (Included in AGI score)
- Repeals the exception that relieves a taxpayer from providing contemporaneous written acknowledgement by the donee organization for contributions of $250 or more when the donee organization files a return with the required information. (Included in AGI score)
Next up, H.R. 1 goes to the full House for consideration and a vote, which is expected sometime next week before lawmakers recess for Thanksgiving, according to House Majority Leader Kevin McCarthy (R-CA). The House will then wait for the Senate to pass its version before conferencing the differences.
The Senate was not about to let the House have all the tax reform fun this week. Late Thursday, Senate Finance Committee Chairman Orrin Hatch (R-UT) unveiled the Senate version of tax reform, also called the Tax Cuts and Jobs Act. For our sector, this bill is not all that different from the House bill. Here are included provisions that we care about:
- Same as House bill — Standard deduction is doubled and charitable deduction is preserved. (Cost not specified)
- Same as House bill— AGI limit on charitable deduction for cash gifts from individuals: increased to 60 percent from the current level of 50 percent. (Cost not specified)
- Same as House bill— Elimination of the Pease limitation (cost not specified).
- Estate tax exemption doubled to $10 million. (-$9.3B/year)
- Same as House bill— 1.4 percent excise tax on investment income of private colleges and universities with at least 500 students and assets valued of at least $250,000 per student. (+$250M/year)
- Same as House bill— 20 percent excise tax on executive compensation over $1 million at tax-exempt organizations. (+$360M/year)
Of note, the Senate version does not yet include a streamlined private foundations excise tax, any provisions related to reporting requirements or payouts for donor-advised funds, or repeal of the Johnson Amendment.
Please keep in mind that this is the first step in the Senate process. The Senate has generally been much more supportive of the sector than the House, specifically the charitable deduction. We expect to see this reflected in future changes to the Senate bill which will come over the next several weeks.
As for timing, we expect the Senate Finance Committee to begin a markup on its legislation late afternoon on Monday, November 13. Following a vote out of the Finance Committee, the Senate could consider the legislation as early as the week of Thanksgiving, but more likely the week following the holiday.
While the markup of the House Republican tax reform bill was in full swing, the Joint Committee on Taxation released a memorandum Tuesday that confirmed the very concerns that ACR and our partners in the nonprofit sector have been proclaiming for months.
“For tax year 2018 [under current law], we estimate that 40.7 million tax payers who itemize will deduct charitable contributions totaling $241.1 billion. Under H.R. 1, we estimate that approximately 9.4 million taxpayers who itemize will deduction charitable contributions totaling $146.3 billion in 2018.”
The memo confirmed two things. First, the number of those who will itemize will be greatly reduced, which was also a finding in a study released earlier this year by Indiana University’s (IU) Lilly School of Philanthropy; and second, charitable deductions will fall by $95 billion, or 40 percent, under the current House tax reform bill. To clarify, this does not mean that charitable giving will fall by $95 billion, only that the amount being claimed as a charitable deduction will fall. It confirms the ramifications for the charitable sector that comes with greatly reducing the number of those who will itemize. We have mentioned the $95 billion concern throughout the year, such as here, here and here.
In terms of actual charitable giving lost, the IU study found that as a stand-alone provision, increasing the standard deduction would reduce giving by $11 billion.
Charities have rallied behind a universal charitable deduction as a way to protect against the consequences of an expanded standard deduction documented by JCT and IU. One legislative option available to lawmakers is H.R. 3988, the Universal Charitable Giving Act of 2017, which was authored by Rep. Mark Walker (R-NC) and would expand the charitable deduction to all Americans.
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