02 February 2018

ACR News 2.02.18 – Taxes and Charitable Giving Are Not the Same

>> Federal: Washington Roundup
>> Federal: First Quarter 2018 
>> Federal: Left-Overs from the Tax Reform Bill
>> Federal: ACR Summit for Leaders
>> Consider This: Taxes and Charitable Giving Are Not the Same
>> Top Reads: Charity and Taxes: 4 Questions Answered

Washington Roundup

The House and Senate were in session earlier this week and the big focus was on President Trump’s first State of the Union address. The President delivered his speech to a Joint Session of Congress on Tuesday, January 30, and it received mixed reviews in the media. However, according to a CBS poll, 75 percent of voters who viewed the speech approved of the address.

Following the State of the Union, congressional Republicans departed Washington for their annual retreat, where they reportedly to talk about the new tax law, infrastructure and the midterm elections. Following the retreat, GOP tax writers will go on a half-day retreat on February 6 to map out their agenda for 2018, with unfinished business on taxes expected to be on the agenda.

First Quarter 2018
There are several must-do items on Congress’ agenda for early 2018, all of which could delay lawmakers from addressing priorities such as making tax and infrastructure changes.

On January 22, lawmakers passed their fourth consecutive bill to extend current government funding levels, this time until February 8. Reports indicate another short-term extension is in the cards for early February, as lawmakers continue to work on topline budget levels and a longer-term spending package.

Earlier this week, Treasury Secretary Steve Mnuchin said the debt ceiling will need to be addressed at the beginning of March, and the Congressional Budget Office backed up that estimate. Even without any hiccups, we expect the debt ceiling, along with government funding and other imminent debates such as immigration, will take up most of the oxygen in Washington for the next couple of months.

Left-Overs from the Tax Reform Bill
Universal Charitable Giving Act
Last year Rep. Mark Walker (R-NC) and Sen. James Lankford (R-OK) introduced the Universal Charitable Giving Act in 2017. The legislation would provide a charitable deduction to non-itemizers with a cap set at one-third of the standard deduction (about a $4,000 deduction for singles and $8,000 for couples). This legislation did not make it into the tax reform bill but Representative Walker and Senator Lankford told ACR recently they intend to continue to pursue their legislation, despite little data on what the full effect of tax reform is on charitable giving.

Last week, Rep. Walker penned a Dear Colleague letter to encourage his fellow members of Congress to support the legislation. We’re committed to working with colleagues in the sector to urge lawmakers to cosponsors both bills, and we hope you can help.

State-level SALT Workarounds
Another big ticket item that is getting a lot of press is the change to the State and Local Tax deduction (SALT).  On Tuesday, January 30, California’s Senate cleared the first major hurdle in their effort to work around SALT deduction cap by approving legislation that would allow residents to pay taxes through a federally-deductible, state-run charity. The legislation now heads to the state Assembly.

The Treasury Department, however, is considering putting states on notice that they should not form these funds to allow taxpayers to circumvent the cap, according to Thomas West, tax legislative counsel at Treasury. When and if Treasury will issue that notice is unclear.

Alternatively, states like New York are working on other ways for their residents to avoid the cap. New York Governor Andrew Cuomo said he’s considering an idea that would allow employers to deduct costs by converting some state income taxes into payroll taxes. According to the Wall Street Journal, Mr. West was less critical about this kind of workaround.

Public Reaction
In a new Monmouth University poll, the public’s view of the new tax law has risen dramatically since its passage in December. Of respondents, 44 percent said they approve of the package (H.R. 1) up from 26 percent in December. However, those who anticipate a tax increase (36 percent) still outnumber those who anticipate a cut (24 percent) or to pay the same (32 percent).  Employers have until mid-February to reflect the new withholding amounts in their employees’ paychecks.

ACR Summit for Leaders
Last year, Congress passed the first comprehensive tax reform legislation in over three decades – and it will have a profound effect on our sector. What does this new law mean for charities? And where does the sector go from here? We’ll examine those questions and other topics at the ACR Summit for Leaders, which will be held as part of United Philanthropy Forum’s Foundations on the Hill. Programming features leaders in philanthropy, policy experts, and congressional staff.

We invite you to join us to get the insider’s view of Congress and learn about what we can do to protect private giving and educate lawmakers about the critical role of charitable organizations in a free society. If you are unfamiliar with the ACR Summit for Leaders, we encourage you to review what we discussed last year.

Registration: Detailed programming will be announced in the near future. To register for the ACR Summit as well as other events of Foundations on the Hill, click here. Attendance at the ACR Summit is free of charge.

Consider This – Taxes and Charitable Giving Are Not the Same
Over the years, there have been numerous ways that people and institutions have employed to “repurpose” themselves as charities – in most cases for tax benefits.  Such schemes rarely work out well, as orthopedic surgeon and minister of the Church of Compassionate Service Dr. Timothy Dale Jackson might tell you. If, that is, you can get through to him at the federal prison in Yazoo, Mississippi where he is currently serving a 75-month term for tax evasion.

In response to the recent tax reform legislation, some state governments seem to be borrowing a page from Dr. Jackson’s playbook and are considering declaring themselves charities in order to allow their citizens to reduce their federal taxes.

In the past, taxpayers who itemized have been able to deduct the full amount of their state and local property, sales and income taxes from their federal taxable income. But the recent tax legislation capped the amount of state and local taxes that can be deducted at $10,000. As a result some taxpayers will see their taxable income, and thus their taxes, increase.

Some politicians in California, Maryland, and New Jersey (so far – others may follow) want to allow taxpayers to give money to a special fund set up by the state, ostensibly charitable in nature. Donors to the fund would receive tax credits on a dollar-for-dollar basis that could be used to offset state income tax liabilities. The money coming in to the state’s coffers wouldn’t change, the money sent to the state by the taxpayer wouldn’t change, but – and here’s the whole purpose of this maneuver – the money given to the state would be deductible for federal tax purposes as a charitable contribution. In essence, taxpayers in those states would be converting non-deductible state and local tax payments into deductible charitable contributions.

At least that’s the theory. There’s been a lot of ink and electrons devoted to explaining why this will or will not work (here are two of the more informative, first from the Tax Foundation explaining why it won’t, and second by a group of law professors explaining why it will). But it seems that lost in the question of whether it can be done is whether it should be done. From the perspective of philanthropists who give to support an independent, vibrant civil society, the answer is probably not.

The independence of civil society rests on the premise that government and charity are two very different things, and the existence of the charitable deduction is in part a reflection of this division. Both are supposed to be pursuing public benefits, of course, but the government relies on compulsion to achieve its ends (that’s not a criticism) while charities are voluntary in nature.

You can choose whether or not to give to the Boy Scouts of America or Meals on Wheels, generally with no consequence other than what your conscience compels. You can also choose not to pay taxes, but the consequences for that are quite a bit more dire (just ask Willie Nelson). Likewise you can pick and choose to which charitable associations’ requirements you want to adhere, such as a house of worship or civic group, and depart or ignore those associations at the time of your choosing. Government, on the other hand, tends to be more fastidious about obeying rules, and only with some difficulty can you quit it.

What is being proposed in California and elsewhere would blur the two, and suggest that government and charity are the same, or at least sufficiently indistinguishable in that sending money to the former is little different than sending it to the latter.

It’s certainly true that in some cases, giving to the government is charity. Probably the most common example would be someone donating to a state university, but many state and local governments also have parks, museums, hospitals, and other entities or agencies that accept charitable contributions. And some states even have programs that at least superficially look like what is being proposed in California, such as those that give tax credits to businesses and individuals who donate to organizations that provide scholarships for children to attend private schools.

These tend to be fairly narrow programs tailored to achieve a specific aim, often identical to what is being done in civil society. Gifts to a nonprofit hospital are tax deductible, for example, so making gifts to a state or county hospital tax deductible as well seems reasonable. Tax credits to advance specific types of charitable activity, like giving to scholarships or for land conservation, similarly reflect a legitimate government interest.

But what is being proposed is to declare the government itself a charity, worthy of the same consideration and treatment that is reserved for nonprofits that feed the hungry, house the homeless, heal the sick, enrich our culture, nurture our spirits, and educate the public. True, government does many of these things as well, but so does business. The government is not civil society, and changing tax policy to pretend that it is would threaten the integrity of both.

These schemes would turn the charitable deduction, an indispensable guardrail between government and civil society, into merely another tax dodge. This would make it even harder to defend the charitable deduction’s continued existence, let alone pushing to democratize giving by making the deduction available to all Americans. It threatens to erase the lines between government, which by its nature has to be somewhat inflexible and wide-ranging, and the millions of “little platoons” (as de Tocqueville called America’s charities) that are idiosyncratic, diverse in approaches, and focused on particular missions.

As for state and local governments, it can hardly be a positive if they are trying to get into the dubious tax strategies racket, competing to peddle tax avoidance schemes while adding nothing to true civil society. Taxes are taxes, charity is charity, and whatever the angst caused by the recent tax legislation, it would be best not to confuse the two.

Top Reads

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