Higher education officials listened with alarm last October as Rep. Tom Reed of New York described how the government could use the “big pot of money” that are university endowments to lower tuition costs at their schools and at poorer colleges.
The argument, which included a hungry itemization of the income of Harvard, Yale and Texas University, was particularly concerning coming from a Republican. The image of Republicans, along with Democrats, licking their chops to redistribute wealth, charities are deeply worried.
And the threat to university endowments is just one of several looming ever more darkly over non-profit organizations.
Museums, charitable foundations, political nonprofit organizations, and all other kinds of charities worry that the next president and Congress could cut into their tax benefits, make life much more difficult in various ways, and intrude on their freedom to do good works as they see best.
A strong smell of corruption wafting out of the Clinton Foundation, and other scandals, have tainted the nonprofit sector somewhat in the mind of the public, which makes it an easier target when Congress is looking for a new source of revenue to slake its insatiable thirst for spending money.
The charities worry not only that their money is under threat, but also that governments at all levels are considering mandates and rules limiting the freedom of donors and charitable giving as a whole.
Taxpayers will deduct $47 billion from their taxes for charitable giving this year, according to Congress’ Joint Committee on Taxation. That huge sum is a measure of public generosity. We are more likely to give to good causes than are any other people, with the possible exception of the citizens of Myanmar.
Yet Congress could decide to stop shielding charitable dollars from taxation, and leaders of many charities, foundations, and schools fear it will shortly try to do just that.
Like pirates spying a laden galleon, lawmakers are itching to get their hands on the golden cargo. But, the charities are getting ready to repel congressional boarders.
A battle is imminent.
“Over the last eight years, charitable giving incentives have been under more scrutiny by Congress probably than they have been since they were first created in World War I,” said Steve Taylor, head of public policy for United Way Worldwide.
Taylor is one of several senior representatives of nonprofit organizations who told the Washington Examiner that the sector is planning to switch from defense to offense, and will soon mount a big lobbying push not just to protect existing tax breaks, but to expand them.
Tax break under siege
This concerted effort was first prompted eight years ago, when President Obama shocked the sector by proposing, in his budget, that the value of taxpayers’ charitable deductions be limited for wealthy people.
His measure, which was never enacted, would have limited all deductions to a lower rate of income tax, 28 percent, rather than allowing those in the upper-income bracket to deduct at their 39.6 percent rate.
Smaller savings would make charitable giving less attractive to the wealthy.
Obama’s cap has appeared in every version of his presidential budget, and in recent years it has begun to gain traction with Republicans, to the alarm of charities. Dave Camp, the former GOP chairman of the House Ways and Means Committee, proposed a 25 percent cap in the draft tax reform he introduced in 2015.
Nonprofit administrators hate the cap because its impact would fall on charities, rather than on taxpayers themselves.
“It’s not the donors that get hurt, right? A donor who gives away a dollar is a dollar poorer, whether or not they get a deduction,” said Sandra Swirski, executive director of the Alliance for Charitable Reform, the policy arm of the Philanthropy Roundtable. “It’s not the donor that gets hurt, but the charity [that] doesn’t get the funds.”
“When you limit the value of the deduction, you take away the incentive for people to give, particularly high earners,” she added.
This summer, House Republicans introduced an outline of legislation to lower tax rates. The tax reform, backed by Speaker Paul Ryan, would make up lost revenue by eliminating almost all deductions and credits. Its designers said that the charitable giving incentive would be kept in some form, but haven’t said exactly what that would be.
The GOP plan could also cut into the charitable deduction from below. It would raise the standard deduction to $24,000 for married couples, meaning that any household could deduct at least that much from their taxable income. Such a large automatic tax break would mean that fewer families would have enough itemized tax deductions to justify itemizing versus taking the standard deduction, and as a result fewer would be affected by incentives such as the charitable giving break. In fact, the stated goal of the Republican plan is to reduce the share of taxpayers who itemize from about one-third today to less than 5 percent.
Ben Kershaw, director of government relations for the American Alliance of Museums, worries that shrinking the number of itemizers would hurt charities and undermine their political support. “If the only people who are claiming it are people who make a lot of money and have a lot of deductions, that’s not the environment you want to be in politically and it’s also not the spirit of the charitable deduction,” he said.
Over the top
Under pressure to account for money he claimed to raise for veterans, Donald Trump listed charities he says have now received millions of dollars from a fundraiser he held in January. (AP Photo)
Charitable groups, seeing all this ugly stuff coming their way, decided to launch a bold bid to allow taxpayers to deduct all the money they contribute from their taxable income.
In tax lingo, the break for charitable contributions would become an “above-the-line” deduction. Contributions would be subtracted before arriving at adjusted gross income, which is the “line.” That would make it unnecessary to itemize deductions to take advantage of the incentives for contributing to charity. Instead, all taxpayers would get the break.
“If somebody, whether they are working in a manufacturing plant, or an office, or some kind of small business, or whatever it might be — if they decide they want to take some of the money that they have earned and give it away to charity, then the principle is they shouldn’t be taxed on that money,” Taylor said.
Taylor said the effort to do so is under way, and United Way representatives are talking to key tax-writing legislators in their home districts over the summer recess.
“We think that there is real opportunity to encourage lawmakers to think about extending the deduction to all taxpayers,” said Geoffrey Plague, vice president for Independent Sector, a group that advocates for nonprofit organizations.
Plague noted that, prior to the 1986 tax reform, the deduction was available to everyone. Today, it’s available only to itemizers. Only about half of people earning $50,000 to $100,000 itemize, whereas virtually all high earners do.
Extending the tax break to everyone “would modestly increase giving,” said Eugene Steuerle, a tax expert at the Urban Institute in Washington, but it would also cost the Treasury in terms of revenue.
Just how much giving would be incentivized, and how much tax revenue would be lost, by moving the deduction above the line is a complicated question.
But there is strong evidence that tax breaks for charitable giving do spur generosity.
Williams College economist Jon Bakija arrived at an estimate by looking at trends in giving among the rich as top income tax rates have fluctuated over the years. The higher the top income tax rate, the greater the incentive to give to charity, because less money is lost compared to not giving.
Bakija found that, for very high earners, raising the tax rate 1 percent would lead to a .76 percent decline in giving. A more sophisticated analysis, based on the differences in charitable giving across states with different taxes, found that a 1 percent increase would lower giving by 1.5 percent. Bakija got a similar result from an analysis of IRS data on individuals over time.
In other words, curbing the incentive for charitable giving would likely reduce giving, perhaps by a lot.
Steuerle, in an analysis of the Camp tax draft, found that it would have decreased charitable contributions by up to 14 percent.
Under threat
A strong smell of corruption wafting out of the Clinton Foundation, and other scandals, has tainted the nonprofit sector somewhat in the mind of the public. (AP Photo)
While nonprofit organizations are quick to make the case that they rely on tax incentives, they also recognize that the public perception of nonprofits has deteriorated.
“Public trust in nonprofits has been declining for a long time,” said Leslie Lenkowsky, an Indiana University professor who specializes in the subject.
Thirty-five percent of people have little or no trust in nonprofit organizations, according to a 2015 poll conducted by the Chronicle of Philanthropy, a number that first rose in the early 2000s and has remained elevated since. The share of people saying that charities do a good job of spending money wisely has remained low, at 13 percent, while fewer people think they do a good job of helping people.
A pervasive fear is that high-profile scandals might be damaging. In particular, controversies involving the Clinton Foundation and donor access to Hillary Clinton have made charities an election year hot topic. Donald Trump has also contributed to politicizing charity by inviting skeptical questions about his own charitable giving.
Charities are now trapped in “a political environment,” Lenkowski said.
Swirski worried that charity may be “becoming a political football, which doesn’t mean good things for the community.”
The fear is that public misgivings are translating into policy.
Predicting a major overhaul for nonprofit taxation in the next Congress is difficult. The biggest unknown is who the president will be. Clinton is a known quantity; her tax plan includes an Obama-style cap on deductions, although she says she would exclude charitable contributions.
Trump’s policy is unknown. At times he has been open to expanding tax benefits for nonprofit organizations, such as when he called for repealing the “Johnson Amendment” that prevents churches from engaging directly in politics while maintaining their tax benefits. Yet at other times his campaign has seemed willing to crack down on charities, such as when his economic adviser Stephen Moore suggested that billionaires Bill Gates and Warren Buffett unfairly use charitable foundations to shield income from tax.
In any future tax reform, charities are at a disadvantage, since their lobbying clout is much weaker than that of other sectors, real estate, for example.
But they have the big advantage that the break for charitable contributions is overwhelmingly popular with voters.
Yet budgets for years will be tight, and members of Congress will look for savings everywhere, especially at organizations and individuals that have fallen out of favor. Aggressive egalitarianism, which has become more acute during the Obama presidency, has fostered a climate of envy, critics say, in which those with substantial sums of money are seen reflexively as having either obtained it improperly, or a duty to “spread the wealth,” or both.
“We’ve seen from Congress, as well as from the current administration, this skepticism about accumulations of wealth, whether it be in university endowments, or in large foundations, or large charities,” Swirski said.
Rules and restrictions
Dave Camp, in his 2014 draft tax reform bill, proposed a 1 percent excise tax on large endowments. (AP Photo)
Tax disincentives are just one of the many concerns facing charities about the way that skepticism plays out in policy.
Members of Congress have recently poked around with other ideas for tightening tax rules for nonprofit organizations, or imposing new regulations on them, effectively mandating certain types of giving. This could, in principle, nationalize endowments and charitable giving by forcing organizations to spend the money the way Washington wants. And state governments have gone even further than the feds.
Universities with big endowments appear to be in Congress’ crosshairs, and not just if they get investigated for preventing campaign activity on campus. Harvard’s $36 billion endowment, and Yale’s $25 billion are likely to make them targets for as long as budgets are tight and as long as lawmakers want to focus on the issue of inequality.
Camp, in his 2014 draft tax reform bill, proposed a 1 percent excise tax on large endowments. More recently, Rep. Reed has been planning legislation mandating that schools with big endowments spend a certain share of their investment income to subsidize tuition fees. If they failed to fulfill that mandate, their taxes would go up.
“We seem to be in an era where there is a lot of skepticism about elite institutions, wealthy institutions,” said Steven Bloom, the director of federal relations at the American Council of Education, which represents higher education institutions. “We seem to be a ready target.”
One concern universities have with Reed’s idea is that in many cases it would not be possible to legally redirect endowment earnings to tuition assistance under state laws. If donors earmark gifts for specific areas, such as sports, arts or student activities, the university cannot later redirect that portion of the endowment to tuition fees without running afoul of donor intent laws.
If Congress does require rich schools to spend a certain amount of endowment earnings on tuition, Bloom said, “we’re going to be put in a difficult position,” having to choose between state law and federal law. The other option would be for Congress to pre-empt state laws protecting donor intent. That, Bloom noted, would put Republicans in the position of regulating how private individuals spend their money.
Schools with multi-billion dollar endowments also face predation by state governments that want to balance their budgets. This spring, Yale fended off a bid by the Connecticut legislature to pass a bill that would have taxed endowments of $10 billion or more, affecting only Yale.
While school endowments may be at the greatest risk, there are other signs of legislative interest in cracking down on tax-exempt organizations. In June, Senate Finance Chairman Orrin Hatch, R-Utah, released a review of tax-exempt private museums that cast a critical eye on their use.
Many such museums, the report found, are located on or near their benefactor’s private property, and some are rarely open to the public. In other words, it appeared that rich art collectors might be benefiting personally from a tax break meant to benefit art for the public. The part of the tax code dealing with charitable giving to museums, Hatch warned, appears to be “ripe for exploitation.”
Edge of politics
Groups that advocate for specific policies or political goals gained a major boost with the 2010 Citizens United decision. (AP Photo)
The nonprofit organizations facing the greatest prospects of upheaval, however, are those that are near, or straddle, the line between charitable giving and political activity.
Groups that advocate for specific policies or political goals gained a major boost with the 2010 Citizens United decision, but at the cost of major controversy about the demarcation between electioneering and legitimate nonprofit activity, and particularly about the role of anonymous giving in politics.
The case is straightforward: If corporations can contribute to political nonprofit groups, those organizations should disclose where they got the money. That is the aim of the DISCLOSE Act, backed by Democrats in Congress and demanded in the Democratic Party platform, as well as legislation being considered at the state level throughout the country.
The push for donor disclosure bills is a “concerted and organized effort by those who philosophically misunderstand that privacy and secrecy are two different things,” said Lawson Bader, CEO of Donors Trust.
Donors Trust is a donor-advised fund responsible for directing money from contributors to causes, allowing donors to remain anonymous if they wish and allowing them control over the ideological tilt of their giving. Donors Trust has supported free-market think tanks and advocacy groups, prompting Mother Jones to describe it as the “dark-money ATM of the conservative movement.”
Republicans in Congress have sought to strengthen protections for similar groups, including by proposing in the party platform to roll back campaign finance limits. The Koch brothers, prominent donors to conservative and libertarian groups and causes, have lent their support to one bill that would prevent the IRS from collecting information about donors to political charities, casting the bill as necessary to protect free speech.
Bader argued that the effort to force donor disclosure is a project undertaken by people who dislike charities in general and want the work they do instead done by government. “Transparency is always to be applied to the government, and privacy is for citizens,” he said.
While donor disclosure legislation may face dim prospects in Congress, especially with GOP control, versions of it have better odds in the states.
In the past few years, 20 states have considered donor disclosure laws, said Starlee Coleman, a senior policy adviser at the State Policy Network, an organization that supports state conservative think tanks.
Coleman referenced one upcoming ballot measure in South Dakota that would require disclosure of donors for groups that advocate for specific measures. Such laws would have the effect of infringing on free speech, she argued, particularly for conservatives in certain parts of the country. For donors to conservative causes to have their names put on public registries “and face the wrath of supporting conservative policies in a blue state, that could be really challenging.”
“There is a concern that this will generate retaliation against donors,” said James Piereson, president of the William E. Simon Foundation, a right-leaning grantmaking organization.
Piereson referenced legislation considered in California in 2008 that would have required nonprofit groups to disclose metrics about diversity on their boards of directors as well as on the recipients of grants, mandating reporting on gender, ethnicity, sexuality and more.
That effort, which was unsuccessful, is one example of “retaliation” by the Left, in Piereson’s view, against organizations that they see as part of politics but that really are not.
“These are organizations that are not involved in elections,” he said. “These are groups that are advocating a point of view, and they’re not electoral organizations, and they’re not lobbying organizations.”
Yet the line between a 501(c)3 intended to educate the public about conservatism or to raise awareness about climate change and one meant to sway an election is blurry.
So is the difference between a multi-billion dollar college endowment that underwrites the school’s activities and one that is really a hedge fund with students.
The same goes for the distinction between a private collection of art that a patron has financed for the public’s benefit, and a self-serving tax arrangement for millionaires.
In each case, however, the public and the government are tilting away from trusting nonprofit groups. Changing the rules in their favor will be an uphill battle.
