URBAN INSTITUTE Perspectives on the National Tax Policy Debate Eugene Steuerle The Urban Institute June 9 2014 Washington Update Council on Foundations – Philanthropy Exchange 2014 Annual Conference Tax Policy and Charities website: http://www.urban.org/taxandcharities/index.cfmhttp://www.urban.org/taxandcharities/index.cfm Dead Men Ruling website: http://www.deadmenruling.comhttp://www.deadmenruling.com Government We Deserve Blog: http://blog.governmentwedeserve.orghttp://blog.governmentwedeserve.org
Broad Budget and Tax Reform Goals Usually Unrelated to Charity Charity not the primary issue in many proposals President Obama Fix budget (leads to revenue raising proposals) Pay for spending he favors (leads to tax increases) Only raise taxes on high income (leads to cap) Chairman Camp Broaden base to show maximum rate reductions (leads to multiplicative efforts) Simplify taxes (leads to fewer itemizers) Concern over enforcement (also leads to floors, fewer itemizers) Go after abuses, real & perceived
Yet All Recent Major Budget and Tax Reform Proposals Affect the Nonprofit Sector President Obama (2011)Chairman Camp (2014)Bowles-Simpson (2010) -- Limit value of each itemized deduction to 28% of the expense for families making over $250,000 a year -- Lower rates -- Few itemizers -- 2% AGI floor -- 40% max deduction -- Cap gains (+ & -) -- excise taxes (e.g., foundation ex. tax) -- restrict donor advised funds --other regulations -- In lieu of a deduction, allow all taxpayers a tax credit equal to 12% of their donations, subject to a 2% AGI floor
Loss of Control over Budget: Why Every Major Budget and Tax Proposal Tends to Raise Revenues from Charities
The Effect of Reform Varies Widely Within the Nonprofit Sector Revenue Sources by Sector Private Contribu- tions Private Payment Gov’t grants/ payments Other revenue Arts, Culture, Humanities 44%34166 Education 2065150 Environment, Animals 5128156 Healthcare 459352 Human Services 1728514 Source: National Center for Charitable Statistics calculations based on the Urban Institute, National Center for Charitable Statistics, Core Files (2009); Internal Revenue Service, Statistics of Income Division, Exempt Organizations Sample Files (2007); American Hospital Association Survey, 2009; and the Centers for Medicare & Medicaid Services, National Health Accounts.
Can We Favor Some Types of Charities? Government does favor some charities through direct spending The charitable tax deduction: the one incentive where individuals choose, signal priorities, and fill in gaps that government will not or cannot address
Some Effects on Total Charitable Giving --Excludes Gains from Broader Reform-- Total GDP, 2013 = $16 trillion Individual giving, 2012 = $229 billion (Giving USA) Total Tax Subsidies, 2013 = $48 billion (Urban-Brookings Tax Policy Center) Reduction in giving from different proposals: (Urban-Brookings Tax Policy Center) Camp Total of Several Provisions (Excluding 40% cap & cap gains) -6% to -12% Rate structure -1% to -2% Standard deduction/personal exemption-1% to -2% Itemized deductions (other than charity)-1% to -3% 2% floor-2% to -4% President Cap Only -2% to -4%
Effects of Camp Proposal on Giving Incentives Current Law Camp Proposal Change (by itself only) due to: Rate Structure Standard Deduction / Personal Exemptions Itemized Deductions (excluding charity) 2% Floor $22.70$11.90-$1.50-$1.40-$2.00$-3.40 Average Subsidy per $100 of Charitable Contributions Source: Urban-Brookings Tax Policy Center Microsimulation Model (version 0613-3).
Effects of Camp Proposal on Giving Incentives Camp Pro- posal Change due to: Rate Structure Standard Deduction / Personal Exemptions Itemized Deductions (excluding charity) 2% Floor Low Response -$15b-2 -3-5 High Response -30-4 -6-10 Change in Total Charitable Contributions (billions of $2012) Source: Urban-Brookings Tax Policy Center Microsimulation Model (version 0613-3).
Effect of 28% Cap in FY2015 Budget on Charitable Contributions ($ billions) Low ResponseHigh Response Total Change on Charitable Contributions (billions of 2013 dollars) -$4b-$8b Source: Urban-Brookings Tax Policy Center Microsimulation Model (version 0613-3). Note: high response is elasticity of -1.0 and low response is -0.5.
Them Against Us? And who are we? The “them’s” or the “us’s”? The real goals should be to strengthen the nation’s Fiscal situation Tax system Charitable Sector We all have a stake in each sector’s success Charities take big hits from Spending cuts Weakened economy Government will have increased responsibility with a weakened charitable sector
Budget & Tax Battles Not Easily Compromised If a sector fights all cut-backs, then limited gain to elected officials to make trade-offs Charitable sector sometimes viewed as just another interest group If sector compromises, it fears only revenue gainers will be picked off, e.g., in some future deficit reduction package
A Better Way: Replace Less Effective With More Effective Incentives --Rough Ranking of Potential & Actual Incentives-- (from Highest to Lowest Charitable Yield Per Dollar Spent) Compliance efforts (including legal restrictions) Allow giving until April 15 or filing of tax return Perhaps $3 to $6 dollars of giving gained per dollar of revenue pick up Allowing a deduction instead of a credit (current law) Greater loss of charitable giving if higher-income givers more “price” sensitive Removing the excise tax on foundations $1 gain in charitable output per $1 loss in revenues Allowing a non-itemizer deduction Lower response if lower-income givers less “price” sensitive Avoiding a floor (e.g., 1% of income) under charitable giving (current law) Extremely limited gains in charitable giving per dollar of revenue pick up
Combinations of Proposals: Example of Two Options to Change the Charitable Deduction, 2011 (High response rate) Cash Income Percentile22% Cap on Deduction "Above-the-Line" Deduction with 1.7% AGI Floor Revenue effect ($ billions)10.4 Total change in contributions ($billions)-10.80.0 Source: Urban-Brookings Tax Policy Center Microsimulation Model (version 0411-2). Note: high response (elasticity of -1.0).
For more material on charitable issues, visit http://www.urban.org/taxandcharities/index.cfm http://www.urban.org/taxandcharities/index.cfm For Gene’s column on public policy issues, visit http://blog.governmentwedeserve.org/ http://blog.governmentwedeserve.org/ For Gene’s latest book on public policy, visit http://deadmenruling.com
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