Political Scandal Focuses on IRS Decision-making
The Internal Revenue Service is acknowledging that it applied inappropriate political considerations by flagging for extra scrutiny the applications of conservative groups seeking tax-exempt status as section 501(c)(4) social welfare organizations. At a hearing Friday before the House Ways and Means Committee, the first of several scheduled hearings in the House and Senate, Members of Congress initially expressed bipartisan outrage but then appeared to split along partisan lines. Generally, Republican Representatives sought to determine when the Obama Administration learned of the investigation and whether politically-appointed officials were involved. Democratic Members tended to focus on the vagueness of the law that requires the IRS to apply subjective scrutiny to 501(c)(4) applications, due in part to the Supreme Court’s Citizens United decision which struck down many prohibitions on political activities of such groups. Left unclear after the hearing is whether the scandal and ensuing investigation will delay or undermine efforts in this Congress to enact comprehensive tax reform.
Equally unclear is the extent to which the headlines linking the terms “political scandal” and “nonprofits” will hurt the work of section 501(c)(3) charitable nonprofits, which cannot engage in political activities. The IRS scandal relates to IRS decision-making regarding section 501(c)(4) social welfare nonprofits, which may engage in some political activities without being required to disclose the names of donors, as is required of section 527 political organizations that are devoted primarily to influencing partisan elections.
To protect charitable nonprofits from becoming collateral damage in the fallout from the IRS scandal, the National Council of Nonprofits issued a statement pointing out that “federal law is crystal clear that ‘charitable nonprofits,’ which are tax exempt under section 501(c)(3) of the Tax Code, may not lawfully engage in partisan political electioneering activities.” The statement calls on policymakers and the news media to note with clearer distinction the laws governing the nonpartisan work of charitable nonprofits in communities across the country.
Combined Federal Campaign Changes Threaten Donations
The U.S. Office of Personnel Management (OPM) releasedproposed regulatory changes to the Combined Federal Campaign (CFC), a giving program that allows federal employees to donate to eligible charitable nonprofits. Many nonprofit groups have expressed concern that several proposed changes would harm the effectiveness of the giving program. For instance, one OPM proposal would shift the burden of the cost of the campaign by imposing an up-front flat application fee for participating charitable nonprofits rather than continuing the past practice of charging 10 percent of donations actually collected. This approach could hurt smaller charities unable to pay the higher “entry” or “participation” fee. The proposed changes would also restrict giving options to electronic ones, and move administration of the program from local to regional or centralized offices, potentially creating a disconnect between local nonprofits and the federal employees making the donations. The proposed changes are open for public comment until June 7, 2013 and, if approved, would take effect in 2014.
Charitable Giving Incentives at Risk in the States
This year’s tax reform efforts in Minnesota and North Carolina have threatened to turn the two states with the best package of charitable giving incentives – where they have provided incentives for individuals to give to their local communities even if they don’t itemize their tax deductions – into some of the most restrictive states. Last month the Minnesota House approved a tax reformproposal that would have eliminated the state’s charitable deduction and replaced it with an eight-percent, nonrefundable tax credit available only to those who gave more than $400 ($800 for married joint filers) or two percent of their adjusted gross income. In response to intense advocacy on the part of the Minnesota Council of Nonprofits and many other organizations. The House passed the bill that preserves current charitable incentives and Senate approval is expected on May 20.
In North Carolina last week, leaders in the House unveiled a flat-tax reform plan that would eliminate the non-itemizer tax credit and cap all itemized deductions (including not only charitable giving, but also home mortgage interest and more) at $12,500/individuals and $25,000/couples. The new legislation is one of several comprehensive reform packages that changes nonprofit exemptions and incentives for charitable giving that the North Carolina Center for Nonprofits is tracking (see comparison of legislative proposals).
New York Considers New Nonprofit Governance and Compensation Regulations
The New York Attorney General and several state legislators released two bipartisan bills last week that seek to reform nonprofit governance and compensation practices. The Nonprofit Revitalization Act would require nonprofit boards to perform financial audits and better oversee insider transactions and contracts. The proposal also would impose an obligation that the nonprofit adopt conflict of interest policies and prohibit any employee from serving as a board chair. A separate measure, theExecutive Compensation Reform Act, would require nonprofit boards to review CEO and staff pay to determine the appropriate compensation level. The bill also would mandate that boards at nonprofits with more than $2 million in revenue must review and approve the compensation of the five highest paid employees each time compensation is changed or employment is renewed.
Government-Nonprofit Contracting Reform
Texas Steps Closer to Permanent Nonprofit Council
In recent years, Texas has been aggressively pursuingnonpartisan solutions to government-nonprofit contracting problems, setting up task forces with nonprofit representatives, and recommending cost- and time-saving contracting reforms that improve accountability and results. Having twice created temporary task forces, the Texas Legislature this year is considering establishment of a permanent body to ensure the ongoing involvement of charitable nonprofits in streamlining contract processes and procedures. Legislation would set up theTexas Nonprofit Council to advise the heads of several state agencies, with a goal of improving relationships with faith-based and community nonprofits. The measure passed the Texas Senate without controversy. Thanks to quick advocacy work by the Texas Association of Nonprofit Organizations and others, a last-minute snag in the House Human Services Committee was averted last week and the bill has been sent to the House floor, where it is scheduled for a vote on May 20, 2013.
When Charity Replaces City Services
Nonprofits, volunteers, and donors in Detroit are stepping up toprovide public services that the City has abandoned. Members of a local church boarded up vacant houses that the City is supposed to demolish, while volunteer landscapers repaired dilapidated City parks. The Kresge Foundation paid for the City’s emergency vehicles ($1 million) and pledged contributions for needed economic and infrastructure improvements ($150 million). Yet, while the story is hope-inspiring in some ways, others point out that government’s reliance on charity to deliver core public services is a major problem: "The idea that we are now outfitting first responders through charitable contributions should be very concerning," a representative from the Center for Effective Government said. "There are certain functions that you want government to perform that should not be at the whim of individuals or charities." What do you think? We’d like to know.
More Stories on National Council of Nonprofits Website
Nonprofit Engagement: Statewide, Nationwide
Charitable nonprofits across Washington State recently were given the opportunity to engage with key congressional staffers on the leading federal issues of the day (sequestration and tax reform), thanks to innovative outreach efforts conducted byWashington Nonprofits, the state association of nonprofits in the Evergreen State. Participants learned the latest about the arbitrary federal spending cuts known as “sequestration” from a senior budget and policy advisor for Senate Budget Committee Chairman Patty Murray (D-WA). Three-quarters of the nonprofits on the program reported experiencing or knowing another nonprofit that has experienced cuts under sequestration.
During the second half of the call, the legislative director and tax counsel to Representative Dave Reichert (R-WA) discussed federal tax reform, including the examination by the House Ways and Means Committee’s charitable working group of the charitable deduction, non-cash contributions, and other issues affecting nonprofits. Webinar participants were able to weigh in on various tax reform proposals and discuss the effects on the charitable work of their nonprofits. For instance, more than 90 percent of the nonprofits on the policy forum call identified the charitable giving incentive as a priority for them in federal tax reform.
Both presenters, one representing a Senate Democrat and the other resenting a House Republican, expressed a shared request: to help them to do their jobs, they need input from charitable nonprofits – your stories, your data, and your passion for what communities need.
“Inappropriate Criteria Were Used to Identify Tax-Exempt Applications for Review,” Treasury Inspector General for Tax Administration, May 14, 2013, finding that IRS staff singled out organizations with conservative-oriented names for more detailed review of applications for 501(c)(4) social welfare tax-exempt status.
“Minnesota tax proposal could cut charitable giving,” by Jon Pratt and Sarah Caruso,Minneapolis Star-Tribune, May 13, 2013, making the case for charitable tax deductions and against conversion to tax credits, proposals adopted by the Minnesota House but, following publication of this op-ed, were eliminated from the tax reform legislation.
State and Local Governments’ Fiscal Outlook: April 2013, Government Accountability Office, April 29, 2013, providing a gloomy outlook for the widening gap between revenues and expenses and predicting that governments must cut expenditures by 14.2 percent to avoid deficits.
New Nonprofit Resource
The National Council of Nonprofits has created the new Nonprofit Audit Guide to provide charitable nonprofits with the tools they need to make informed decisions about independent financial audits. Because state laws vary in the scope of their regulation of charitable nonprofits, this Guide includes a 50-state chart that shows whether a state's laws require an audit, and if so, under what conditions. The Guide explains what independent audits are and helps nonprofits prepare for the audit. Additionally, the Guide includes information about special audit requirements that apply to nonprofits that receive funding from the federal government.
Tax Reform Working Group Report Released Today
Comprehensive federal tax reform took a step forward with the release today of a 568-page report by the Joint Committee on Taxation (JCT) to the House Ways and Means Committee. The report does not include specific policy recommendations, but does provide an extensive analysis of all aspects of the Internal Revenue Code and summarizes suggestions for reforms submitted to eleven bi-partisan tax reform working groups. The working group on charitable issues, led by Rep. Reichert (R-WA) and Rep. Lewis (D-GA), conducted meetings with experts to investigate subjects such as the private foundation excise tax, unrelated business income, and commercial operations of nonprofits. Regarding the law relating to charitable nonprofits, the JCT report provides background information (at pages 19-58) about the present law, and specifically identifies (at pages 491-497) comments the Committee and Working Group received on charitable deductions (including to retain or change the deduction as it relates to donations of finances, property, and inventory); tax-exempt status (including unrelated business income tax and operating rules for public charities and private foundations); reporting, disclosure, and tax administration; and the IRA charitable rollover incentive. All of the suggestions and comments submitted to the working groups remain available at the Ways and Means Committee website.
Issue In Focus: Sequestration
Tracking the Impact of Cuts
Nonprofit organizations and individuals are feeling the effects of government budget cuts and increased demands for services, but they are finding it difficult to determine whether the changes are caused directly by sequestration – the $85 billion in federal spending cuts that went into effect on March 1 – or other local, state and, federal spending cuts. In New York, nonprofits working with developmentally disabled persons took a $90 million hit in the state budget following the discovery of a shortfall in federal funds for Medicaid, a program largely exempted from the sequester.Nonprofit Quarterly points out that many of the cuts made under sequestration cross so many budget lines that the implications are often difficult to track. Likewise, the challenge is heightened by the differing responses of the states to sequestration. In administering cuts to long-term unemployment benefits, for instance, Illinois is reducing benefits by as much as 16.8 percentat the end of the month; Maine will instead reduce from 63 to 54 the number of weeks benefits are available. In both cases, pain will be felt by individuals and the economy, but in different ways. The National Council of Nonprofits is collecting stories from nonprofits affected by sequestration and other cuts atwww.GiveVoice.org to help nonprofit leaders explain to policymakers the human consequences of the many cuts.
States Recognizing, Restoring Value of Charitable Giving Incentives to Communities
Hawai’i Governor Abercrombie is expected to sign legislation that removes the cap on charitable deductions the state enacted in 2011 as part of limitations on how much upper-income taxpayers could claim for itemized deductions. After seeing how the cap on deductions adversely affected communities, the Governor himself championed the bill to restore the full incentive for giving to the work of charities in Hawai’i. The effects of the cap, and the need for corrective legislation, were clear: “After having taken a close look at the impact this particular section of the law is having on charitable donations made to Hawaii's nonprofit organizations, we support carving out this portion of the law,” the Office of the Governor said in testimony before a Senate hearing.
Hawai’i is not alone in reversing course after seeing the harmful impact of trying to trim back on tax incentives for charitable donations. Missouri, which allowed a series of charitable tax credits to lapse, recently restored them for food pantries, pregnancy resource centers, and the Children in Crisis program. Also this spring, Montana renewed its charitable endowment tax credit that only a few years ago was on the chopping block. Last month, the Oregon House passed reform legislation that limits itemized deductions, but expressly exempts charitable giving from the caps. On the other hand, Michigan has not yet restored tax credits repealed in 2011 that promoted donations to the work of food banks, homeless shelters, state colleges, and community foundations. As in Hawai’i, reports from Michigan suggest another failed experiment resulting in reduced giving to communities far in excess of the revenue gains.
Work of Nonprofits at Risk as States Revise Tax Systems
While Hawai'i is correcting mistaken tax policy, efforts in other states to enact comprehensive tax reform this year are creating challenges to charitable giving incentives, tax exemptions, and program revenues that help nonprofits serve their communities. Indiana lawmakers approved a two-year budget last month that cuts income taxes by five percent and repeals the inheritance tax retroactive to January 1, 2013. Missouri legislators are coming down to the wire in reaching an agreement with the Governor ontwo tax reform packages that would cut income taxes and increase the sales tax. North Carolina’s General Assembly is pursuing several tax reform proposals, including a bill that, among other things, would reduce individual and corporate income taxes, require nonprofits to charge sales taxes on entertainment and recreation, and eliminate the tax credit for charitable contributions available to individuals that do not itemize on their federal taxes.
A comprehensive tax reform bill that passed the Minnesota House in April would eliminate current charitable deductions and replace them with an eight-percent nonrefundable individual income tax credit for charitable contributions made in excess of the greater of $400 ($800 for married joint filers), or two percent of the taxpayer’s adjusted gross income. The Senate companion bill does not include the provision, so a fight is being waged in the conference committee. In Maine, legislators are reportedly drafting a bi-partisan bill that would remove two important motivators of charitable giving (the charitable deduction and estate tax) and partially eliminate tax exemptions for some nonprofit property owners.
Chicago Mayor Backs Away from Nonprofit Water Fees
Chicago Mayor Rahm Emanuel received national attention for working to revoke waivers that exempted city nonprofits from paying water fees. The effort was seen by some city and county officials elsewhere as a sign that nonprofit resources were becoming fair game to fill budget holes. Nonprofits, led by Donors Forum and others, correctly pointed out that the amounts charged for water fees exceeded costs and were essentially a tax on tax-exempt entities. In response to pressure, the Mayor is now offering a compromise that would reinstate water fee exemptions for nonprofits with net assets of less than $1 million and phases in discounts of 60 percent for nonprofits with between $1 and $10 million in assets and 25 percent for nonprofits with between $10 and $250 million in assets. Museums would maintain a 20 percent exemption regardless of net asset level. Religious leaders in Chicago remain dissatisfied with the Mayor’s offer and arepushing for a broader reinstatement of the exemptions.
Other Taxes, Fees, PILOTs Updates
Government-Nonprofit Contracting Reform Update
Additional Stories on the National Council of Nonprofits Website
Charitable nonprofits in Hawai’i are getting respect from government and business, and it’s worth singing about (a la Aretha Franklin). As reported above, the giving incentive will soon be restored because the Governor was willing to reverse himself. Why? “We recognize that support for nonprofit and charitable organizations is an important policy goal and priority as these groups perform critical services for and within our community,” Governor Abercrombie’s office testified in March.
Nonprofits are also at the policy problem-solving tables in Hawai’i with government and business representatives addressing deep-seated contracting problems. Plus, the Governor recently created a Sequestration Impact Response Team that includes two nonprofit officials to provide the community perspective on how the cuts are affecting citizens and the services on which they rely. Said Lisa Maruyama of the Hawai’i Alliance of Nonprofit Organizations: “It’s important for nonprofits to have a seat at the table to remind people of the priorities and impacts of funding cuts on community health and welfare.”
Government-Nonprofit Contracting Survey in the Field
If your nonprofit received the government-nonprofit contracting survey recently sent out for the Urban Institute by Social Science Research Solutions to scientifically-selected organizations, please fill it out. It is your chance to be heard and make a difference for nonprofits everywhere. The survey results will guide the work of the Government-Nonprofit Contracting Reform Project in fixing contracting policies and processes. Learn more about government-nonprofit contracting reform.
Nonprofit VOTE Webinar
Voter Registration Modernization
Thursday, May 16th at 2:00pm Eastern
Join this webinar for a review of voter registration updates and reforms, such as online registration, election day registration, and portable registration. Register now.
“Nonprofits and State Tax Systems: The Big Picture,” Rick Cohen, Nonprofit Quarterly, April 18, 2013, reviewing how the mix of tax rates, deductions, and credits in the various states affect the work of charitable nonprofits.
“Nonprofits Need Solutions to Illinois' Budget Crisis,” Valerie Lies, President & CEO, Donors Forum, in Huffington Post Blog, May 2, 2013, chronicling the severe budget crisis in Illinois that is exposing government-nonprofit contracting challenges and hurting nonprofits delivering basic human service to 2 million people in need.