Update on Federal Tax Reform – November 14, 2017

On November 9th, the House tax bill was approved on a party-line basis by the Ways and Means Committee. On the last day of the House Ways and Means Committee markup,  Chairman Brady offered a “manager’s amendment” that dramatically expanded the anti-Johnson Amendment provision. As amended, the new harmful Johnson Amendment language, Section 5201, will politicize the 501(c)(3) community by allowing charitable nonprofits, houses of worship, and foundations to engage in partisan electioneering for or against candidates, as long as doing so occurs “in the ordinary course of the organization’s regular and customary activities in carrying out its exempt purpose,” and the organization incurs no more than “de minimis” incremental expenses. The provision would be effective from 2019 through 2023, and is estimated to cost. In addition, the nonpartisan Joint Committee on Taxation (JCT) estimates that the provision would cost the federal government $2.1 billion over just six years because donors would divert their currently nondeductible political campaign donations to political churches and charitable nonprofits in order to claim charitable tax deductions. This legislation is expected to come to the House floor by Thursday with a “closed rule,” meaning that no amendments will be allowed and Representatives will only be able to vote for or against the Committee version of the bill. 

Also on November 9th, the Senate released its tax bill with the Finance Committee’s deliberation set to begin today. Similar to the House Ways and Means bill, significant changes to the bill in the Finance Committee are not likely. Committee members were informed late last week that amendments would be rejected unless they were cost neutral or contained offsetting revenue raisers, and were accompanied by a cost estimate from the Joint Committee on Taxation. Those restrictions have no dissuaded Senators from drafting more than 300 amendments. Senator Stabenow (D-MI) and Ranking Member Wyden (D-OR) have prepared an amendment for Committee consideration that would create a universal deduction that would allow all Americans who take the standard deduction to also claim a deduction of up to 60 percent of their adjusted gross income (AGI).

Other filed amendments to the Senate tax bill include one to incorporate the CHARITY Act, several to make the work and economic development tax credits permanent, and a proposal to permit charitable deductions from estates for donations to non-charitable nonprofits, including 501(c)(4) social welfare organizations, (c)(5) labor unions, and (c)(6) trade associations. Once the Committee completes its work this week, the Senate version will go to the Senate floor under an expedited procedure known as “reconciliation”. This will limit debate and permit passage by a simple majority rather than the usual 60 votes needed to overcome a filibuster. It is expected that the full Senate will vote on the bill after the Thanksgiving holiday.

With a few notable exceptions, both the House and Senate tax bills are closely aligned to the Tax Reform Framework negotiated by Republican congressional leaders and White House officials. Each bill adds to the federal deficit by $1.5 trillion over 10 years by lowering individual and corporate tax rates, and nearly doubling the standard deduction while repealing most deductions and exemptions. Neither bill includes a universal deduction. Both bills would immediately double the exemptions under the estate tax to exclude estates valued at less than $11 million for an individual and $22 million for couples; the House bill goes farther and repeals the estate tax after 2024. The drafts in the House and Senate both turn to the nonprofit community for new revenue, proposing to impose excise taxes on some nonprofit college and university endowments as well as on salaries of higher-paid employees of nonprofits.

Unlike the House version, the Senate bill does not currently include language weakening the Johnson Amendment, streamlining the private foundation excise tax, nor a provision eliminating private activity bonds upon which many nonprofits rely for capital financing. The Senate bill does include several new provisions that could be problematic for charitable nonprofits, including new unrelated business income taxes (UBIT) and rules on intermediate sanctions. Thanks to the diligent work of our colleagues at the National Council of Nonprofits, click here for a detailed and helpful comparison of the House and Senate tax bills.