January 29, 2011
***ISSUE ALERT***
Tax Reform for the Charitable Sector
Congress may be preparing for one of the biggest tax reform efforts in decades. While there certainly will
be plenty of disagreement on details, a level of consensus appears to be brewing in this Congress on the
need for tax reform.
Early this year, Senate Majority Leader Harry Reid (D-NV) said "the country is ripe for tax reform" and
that "our tax system is broken and needs to be fixed." Senate Finance Committee Chair Max Baucus (DMT) started a series of hearings on reform late last year which are continuing this year.
While we have heard cries for reform for a long time now, the continued economic difficulties seem to be
putting the recent elections and the upcoming 2012 elections into perspective. Tax reform has economic
importance that is becoming more relevant for growth and job creation as the recession lingers. Some
Democrats are accepting the fact that support from business groups may be needed in the 2012 elections. A
tweak in the way corporations are taxed, whether permanent or temporary, may be the olive branch needed
to garner much needed corporate support. While short-term action such as December's extension of the
2001 and 2003 tax cuts is necessary and has been taken to spur the economy, comprehensive tax reform is
necessary to boost growth for the long-term.
President Obama’s selection of Bill Daley as his new chief of staff indicates a move towards addressing the
concerns of the business community – which may involve tax reform. It will be interesting to see how
Obama addresses the issue of tax reform in his State of the Union at the end of the month. Statements and
developments of the last few days seem to indicate we may see something more than “lip service” to tax
reform this year.
Senate Finance Committee Chairman Max Baucus (D-MT) and former Ranking Member Charles Grassley
(R-IA), have spent many years investigating tax policies including the activities of tax exempt entities.
They have explored (and the tax writing committees of Congress continue to explore) what is and is not
appropriate use of tax exemption through the existing internal revenue code. Some of the proposals (both
by the Obama Administration and both tax writing committees of Congress) indicate there could be far
reaching implications for not-for-profit entities, including foundations, charities, universities and hospitals.
The Congressional tax writing committees have been looking at issues regarding oversight of the nonprofit
sector for over eight years now. During this time, they have examined a number of nonprofit hospitals,
university endowments, college athletic programs, and media-based ministries. Last year, the Senate
Finance Committee released a discussion draft proposing significant changes to the non-profit world. The
Committees are looking at whether tax-exempt laws have kept up with the significant growth and
development in the industry. The current criteria were codified many years ago and no one could envision
what we see today in the non-profit sector. Congress needs to ensure that the Federal government is not
losing money. Additionally, Congress must protect the tax system and the taxpaying public from entities
who might abuse their tax-exempt status for financial gain. Finally, Congress needs to make certain that
tax-exempt groups use their resources in keeping with the charitable missions they declare to the IRS when
granted tax-exempt status.
Timing: Tax reform efforts will begin to take shape and gain momentum in the coming months. As the
new Congress settles in and gets to work, they face a growing deficit and struggling economy. Corporate
tax reform, including non-profit reform likely will be a key item on the agenda, as both a policy issue and
as a revenue raiser. The White House placed tax reform on its agenda by including related proposals in its
budget last year and with the creation of the President's Economic Recovery Advisory Board (PERAB).
The Board, led by former Federal Reserve Board Chair Paul Volcker looked at tax code simplification,
closing tax "loopholes," combating tax evasion, and "reducing corporate welfare.” It seems almost certain
that the President plans to include reform in the budget this year.
As Congress and the administration continue laying the groundwork for reform, it is a critical time for tax
exempt entities to get involved. As you may imagine, advocacy efforts are most effective prior to the
drafting and introduction of legislation. Once language is written it is often difficult to have a positive
impact on the outcome. Positions are set and deals are made early in the process. Now is the ideal time to
get involved, voice concerns, and educate members of Congress and the administration. It is the right and
arguably, the responsibility of interested parties to tell their story to those writing the tax reform
legislation. We believe the Committees appreciate and welcome information. There is opportunity to
impart knowledge of your particular circumstances and explain how certain code changes will hurt or help.
The tax writing process works best when both the public and the tax writers share knowledge and
information with each other. Nonsensically, too many entities run and hide when a tax reform or
investigatory process is underway and hope they don't get seen or hurt. The best way to protect your
institution is to be proactive. Work with the Committees and help them learn more about what you do,
how you do it, why it works, what changes can help and which ones will hurt and why. Moreover, don't
hide behind or rely solely on associations. Be part of the process. We can help you navigate that process in
the most efficient, productive and beneficial way.
Tax and non-profit reform efforts already have been picking up steam. Congress included tax reform
provisions in passed bills last year. The Senate Finance Committee hearings on tax reform started last year
are continuing this year. Ideas are being discussed, decisions will be made and legislation will be
introduced and marked up. Complex policy matters such as tax reform are difficult to derail once
underway.
Tactics: The two committees with jurisdiction over tax policy (Senate Finance Committee and House
Ways and Means Committee) are also the two committees that are among the most difficult to navigate in
Congress. It is often very difficult to determine where these Committees are headed and what they will do,
as even the smallest change to the tax code can mean millions, even billions of dollars to a company, a
university, a hospital or the federal government. Additionally, unlike appropriations, the tax policy writing
process is cumulative, not annual. So there are VERY few second chances. In order to work with and be
heard by these Committees, one needs a special combination of skills and experience and a keen
understanding of the players and the committee process itself and, of course, an in depth knowledge of the
issues. In order to have a meaningful dialogue with and impact on the tax Committees, entities and
individuals must have credible and convincing arguments based on reality.
If facilitated correctly, policy documents can often be submitted early in the process and, if guided through
the proper channels, support can be secured and risk mitigated by working with both the Committees and
your member delegations. Further, potential damage can be limited with early and effective participation.
Below we summarize key policy changes that are under serious consideration by the Senate Finance
Committee for inclusion in a tax reform effort:
Proposal to Limit Itemized Deductions: Currently, taxpayers earning more than $200,000 (and families
earning more than $250,000) annually can take itemized charitable deductions at a rate equal to their
marginal tax bracket (33% or 35%). Several proposals have been made that would cap the value of all
itemized deductions anywhere from 28% to 35%. President Obama proposed and still supports a 28% cap.
Arguably, limiting the value of charitable deductions could create a disincentive for individuals and
households who give the most to charitable organizations. Some charities have seen donors already
delaying gifts and multi-year pledges. A separate Budget Committee proposal would adjust the 2011
income thresholds beyond which itemized deductions are reduced to $250,000 (indexed for inflation from
2009) for married taxpayers filing jointly and $200,000 (indexed from 2009) for single taxpayers.
Thereafter, the thresholds would be indexed for inflation annually.
Proposals of Special Concern for Universities: For some time now, the Senate Finance and House Ways
and Means Committees have focused on the activities of nonprofit colleges and universities. The
Committees are looking at many issues including executive and board compensation, use of illiquid assets,
athletic department spending, and the ability to issue of tax exempt bonds, liquidating endowments,
minimum pay-outs and administrative costs. Additionally, efforts have already been taken by the IRS
requiring more liberal reporting of salaries and other information for employees.
In the eyes of many on Capitol Hill, some colleges and universities are benefiting from their tax exempt
status and the privilege of issuing tax exempt bonds while sitting on billion-dollar tax-free endowments.
Tuition rates continue to increase at prohibitively high rates taking away the accessibility of higher
education for many middle-class Americans while executive and board compensation remain at high levels
and/or continue to increase. Consequently, colleges and universities are increasingly targets to be evaluated
based on their tax-exempt status and the related advantages versus the benefit they provide to the
community.
The Senate Finance Committee has exhibited particular interest in university endowment spending,
especially as it relates to tuition affordability. The escalating costs of tuition, rising salaries for presidents,
and growing endowments are a tangible concern to the tax writing committees.
Colleges and universities must become engaged on these issues before their hands are forced. Colleges
and universities are facing potential changes to the taxation of nonprofit entities that could be sweeping in
nature. Legislation and regulation could take a variety of forms and impact an array of issues including:
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Endowments could be subject to minimum payout requirements.
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Possible changes to allowable forms of executive and board compensation.
Athletic departments and programs could face strict new regulations and limitations.
UBIT may increase because of ways to block such taxes may be removed.
Colleges and universities may be stripped of their ability to own and manage illiquid assets.
The ability of colleges and universities to issue tax-exempt bonds may be taken away or limited.
Colleges and universities may be forced to meet new requirements to maintain their nonprofit status.
Colleges and universities may be subject to an array of strict Sarbanes-Oxley-like provisions that will
increase their compliance costs significantly and change they way they do business.
Regardless of the direction the process takes, perhaps the biggest risk to colleges and universities is the
cumbersome requirements to which they could be subjected in order to maintain their non-profit status.
You have a much greater opportunity to limit your exposure, costs and damages if you take a proactive role
in this process.
Action Alert: It is unclear specifically how and when the tax laws will change. But change on some level
is coming and there will be plenty of pain to go around. Easy revenue targets are gone and as everyone
knows all too well, money is needed. So even concepts that did not necessarily “have legs” in the past are
now up for consideration. Non-profits can stay out of the spotlight and hope the inevitable changes don’t
hurt too badly, or they can work proactively with the tax writing committees, who we believe will welcome
your interest and informational support.
The time to engage on this issue is NOW. Efforts are currently underway by Cassidy &
Associates to create a coalition of tax exempt entities to combat the impact of tax
reform on not-for-profits. Please contact your Cassidy & Associates team for additional
information.