The 2016 Federal Budget: What Nonprofits Should Know

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Barack, we hardly knew ye. That’s how President Obama’s proposed Fiscal Year 2016 budget makes us feel, due to its bold policy prescriptions that were largely missing during the years when the Democrats controlled at least one house of Congress and, for a short while, both the House and the Senate. As the 2016 elections approach, presaged this year by jockeying among a dozen or so Republicans and hints of a possible yardstick challenge of Hillary Clinton by Elizabeth Warren or Bernie Sanders on the Democratic side, the budget ought to spur nonprofits to tell the current Congress and the next president what is truly important for social progress. It is an opportunity to talk about the meaning, values, and priorities of what government should do in partnership with and through nonprofits to address social needs in this nation.

Now that Senator Mitch McConnell (R-KY) and Rep. John Boehner (R-OH) are in charge, it is hard to see how the president’s proposals have much chance at passing—or, in some instances, even getting the Republicans’ attention at the negotiating table. It may be that Rep. Paul Ryan (R-WI), who’s in charge of the House Budget Committee, will find some aspects of the proposals worthy of a bipartisan grok in search of the underlying principles in the budget that unify Democrats and Republicans in a cosmic whole—but we truly doubt it. The press has focused on the president’s proposal for a $478 billion, six-year infrastructure rebuilding program to be funded by a one-time 14 percent tax on the overseas profits of U.S. corporations, which congressional Republicans will nix on the spot.

Overall, however, the budget’s theme is income or wealth redistribution. Raise taxes on overseas profits of corporations, increase the amount of revenue generated via the estate tax (through a change in how investments are valued), raise the capital gains tax rate, and tax big financial firms. Then, send that revenue back out in the form of increased Head Start funding, expanded Earned Income Tax Credits, greater child care tax credits, and progress on the president’s proposals for universal free preschool and free community college tuition. Income redistribution strikes conservatives as completely anathema, but with the income gap between the rich and the poor at its greatest in decades, the president’s proposals might have some inherent attraction—if those nonprofits that say they are concerned about income inequality mobilize to do something about it.

From the point of view of nonprofit advocates, the budget contains a number of specific proposals that may be unlikely to pass, or even to get much support from some congressional Democrats. Now that the president’s 2016 budget has put these ideas on the table, or back on the table, that makes them items for nonprofits to get behind with advocacy and community mobilization, now and in the future.


Corporate taxes

The president wants corporate taxes reduced from 35 percent to 28 percent—and only 25 percent for manufacturers. The theory is that U.S. corporate taxes are higher than the taxes other countries charge big corporations. In the U.S., however, many corporations don’t pay, 35, 28, 25, or even 2.5 percent in taxes. Citizens for Tax Justice counted 43 major Fortune500 corporations that paid no taxes in 2012, including Facebook, Occidental Petroleum, Southwest Airlines, Ryder System, Corning, Tenet Healthcare, and Entergy. Looking at their cumulative taxes for 2008-12, 26 major corporations paid no taxes for that period, among them Tenet, General Electric, Verizon Communications, Boeing, Pepco, Duke Energy, and American Electric Power. For many top corporations, the official corporate tax rate is irrelevant—and they should be made to pay more, not less.

The possible subtext of the president’s proposed tax program to pay for infrastructure investments is the potential to negotiate a deal with the Republicans to get offshore corporate profits back to the U.S.—or taxed severely if they’re not—in exchange for lowering the corporate income tax rate. In addition to the one-time 14 percent tax on previously untaxed overseas income, the budget calls for a 19 percent minimum tax on corporate foreign income. Corporate financial wizards have long anticipated this tax hit and have been cooking up mechanisms to circumvent it, but the president’s financial advisors have included provisions to tackle the most obvious corporate duck and dodge strategies.

Tax repatriation is seen in the budget as a means of funding the White House infrastructure initiative, but it appears that even if approved, it only funds half of the infrastructure program cost, meaning that the remainder will have to come from appropriations and from matching funds from other levels of government. If nonprofits have a commitment to infrastructure improvement in their communities, and if a tax on corporate income overseas is the mechanism needed to get there, the nonprofit agenda will be self-evident.


Climate change

In the president’s budget emphasis for climate change “resilience,” he has proposed the creation of a 200 person–strong “Resilience Corps” program at the Corporation for National and Community Service to assist communities’ planning for the impacts of climate change. On the international side of fighting against climate change, the budget devotes $1.29 billion to the Global Climate Change Initiative (GCCI), a program of bilateral and multilateral engagement with developing nations. This funding includes $500 million for U.S. contributions to the new Green Climate Fund (GCF), the effort of the United Nations Framework Convention on Climate Change to redistribute money from richer nations to developing countries to reduce their dependence on carbon-based fuels. For their part, the Republicans have already announced that the GCF is not going to get their support.

If there is one thing—aside from the Affordable Care Act—that the president can and should take pride in for his legacy, it is his commitment to addressing manmade climate change, even if he played politics on the Keystone Pipeline for a while to help shore up the election prospects of Red State Democrats. This budget includes a five-year plan of $200 million annually to assist Appalachian communities with the reuse of abandoned coalmines and coal fields and to deal with tainted water from historic coal-mining practices. In addition, the Department of Labor would dedicate funding for retraining laid-off coal workers and helping coal-mining communities with economic development plans. Given even Sen. Mitch McConnell’s oft-stated concerns for helping coal communities adjust to the new non-coal reality, this proposal of the president’s could have legs. Beyond that, the federal fee on bituminous surface coal would rise from 28 cents to 35 cents per ton and for underground coal from 12 cents to 15 cents. If the fee increase is the key to paying for the coal community economic adjustment activities, McConnell will be in a bind.

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Pay-for-success and the like

One of the interesting funding components tucked into the “preschool for all” category, embedded in a proposed $907 million for early intervention and preschool services for children with disabilities, is a $15 million for a pay-for-success (PFS) initiative. Sadly, the PFS language in the budget sounds like so much of the puffed-up social enterprise rhetoric that this administration buys into—in this instance, a PFS “for early identification of and intervention for learning and developmental delays, with a potential focus on autism, intended to help identify, develop, and scale-up evidence-based practices through innovative public-private partnerships that create incentives for service providers to deliver better outcomes.” 

The preschool PFS item is actually part of what is termed in the budget as “Doubling Down on Evidence-Building Efforts.” In that regard, the budget calls for:

  • $300 million—double the 2015 number—to be put into the Investing in Innovation Fund (i3), a Department of Education program to spur innovation in education that has had a mixed reaction from even its most ardent philanthropic supporters;
  • $200 million for the “First in the World” program, focused on higher education;
  • $300 million for a Pay for Success Incentive Fund at the Department of the Treasury (The budget description says it is to “encourage innovation and accelerate the use of evidence-based approaches by lowering and sharing the risk associated with initial private investments and by enabling State and local governments to attract additional investment in services that result in Federal, State, and local government savings.”);
  • $64 million for Pay for Success programs at the Department of Justice and the Corporation for National and Community Service (the latter through the Social Innovation Fund);
  • And the continuation of PFS projects planned or underway at HUD (through the Second Chance Act, aimed at supportive housing, and through CDBG); Health and Human Services (through the Community Services Block Grant); and DOJ, too, with a contract to the Urban Institute to help local governments address prison recidivism through the use of Pay for Success financing structures.

Identified as a corporate consultant, Republican policy strategist, and advisor to America Forward (the collaboration that has lobbied for the Social Innovation Fund and various CNCS volunteerism initiatives), Juleanna Glover wrote in the Wall Street Journal that Republicans should take a leadership role in these PFS or Social Impact Bond strategies as “update(s) [of] the conservative lexicon.” The fit of PFS/SIB to the “conservative approach to social programs,” as Glover headlined her article, is clear:

  • Rather than broadly-based programs, they are narrowly constructed projects, often to demonstrate something that has been well demonstrated already and merits wider government policy adoption rather than narrower private sector-profit-incentivized experimentation.
  • They tend to focus on proving the efficacy (and profitability) of the financing mechanisms and less on the social policies to be demonstrated and disseminated.
  • Increasingly, they involve carving out dollars from existing funding, such as CSBG and CDBG, rather than increasing the pool of funds available for social programs.

Expect Republicans to jockey to endorse the president’s PFS budget components and, with the Republican sponsorship of the PFS components of the Workforce Innovation and Opportunity Act (WIOA), claim that they were there first.


Demonstration programs and public policy

The CSBG and CDBG monies mentioned above refer to the administration’s newest demonstration program, the Upward Mobility Project, which will pick as many as 10 communities, states, or consortia to use money from those block grants, as well as the Social Services Block Grant (SSBG) and the HOME Investment Partnerships Program, “to combine funds from four existing block grant programs designed to promote opportunity and economic development and reduce poverty to test and validate promising approaches to help families become more self-sufficient, improve children’s outcomes, and revitalize communities so they can provide more opportunities for their residents.” The budget promises that the selected Upward Mobility winners will be eligible for some piece of a total of $1.5 billion over five years to add to their efforts.

Upward Mobility communities would be added to the list of other special programs already designated under this administration, such as Promise Zones (the budget suggests 15 additional zone designations on top of the first five by the end of calendar year 2016 to be supported by Empowerment Zone-like tax incentives for businesses), the Department of Education’s Promise Neighborhoods program ($150 million in new funding), and HUD’s Choice Neighborhoods program ($250 million). As we pointed out in early 2014, when the Promise Zones were announced, they came with no new money, simply a promise of better access to existing appropriations and better coordination among federal agencies—and in the budget, the Promise Neighborhoods and Choice Neighborhoods funds are characterized “in support of Promise Zones.

This is public policy by demonstration program. Rather than having broadly available programs to people in need, public policy has devolved into narrowly constructed, one-off (or, in the case of Upward Mobility or Promise Zones, 10-off or 20-off) demonstration efforts. In this policy environment, nonprofit policy advocates end up having to lobby not for programs, but for the next iteration of demonstrations with the hope that their constituents can benefit from demonstration to demonstration. This proposed budget is chock full of demonstrations: $20 million for projects fighting childhood poverty in rural areas; $15 million for a demonstration of the Jobs-Plus model in Indian country; $3 million for law enforcement projects “to partner with local residents, business owners, community groups, and other stakeholders to counter violent extremism”; and “a new Medicaid demonstration project in partnership with the Administration for Children and Families to encourage States to provide evidence-based psychosocial interventions to address the behavioral and mental health needs of children in foster care and reduce reliance on psychotropic medications.”

Why does government operate this way, especially when the demonstrations (or the PFS/SIB projects) might end up cannibalizing existing funding streams? Some might say it reflects the sorry state of public policymaking in this nation, where gridlock prevents doing anything more significant. Others might say it is due to budget constraints that make short-term demonstration efforts that are limited in number easier to mount than real programs. In either case, given that Promise Neighborhoods, Promise Zones, Choice Neighborhoods, and Upward Mobility all purport to address issues of poverty, these demonstrations all demonstrate something else—a sad policy trajectory that has adopted the language of the War on Poverty, but nothing else.


The immigration reform budget

The proposed budget includes a Central America aid initiative is part of the administration’s newfound energy on immigration issues, though few expect the Republican-controlled House and Senate to do much on that score. That one item, $1 billion for Central American relief, contrasts sharply with the puny $40 million that Congress gave the president last year to help Central American nations repatriate children that came to the U.S. Moreover, the president’s budget touts comprehensive immigration reform as a revenue-generating, cost-savings measure. The budget calls on Congress to pass the comprehensive immigration reform legislation that was passed by the U.S. Senate but rejected by the House of Representatives in 2013, suggesting that reform would: “strengthen the workforce by attracting and retaining the best and brightest students whom are trained at U.S. universities, strengthening capital investment and overall productivity, and increasing the number of entrepreneurs starting companies…[and] by adding younger workers to the labor force…[to] help balance an aging population…as the baby boom generation retires.”

With an immigration reform program aimed significantly at educated, high tech–oriented immigrants, the budget cites an estimate by the Congressional Budget Office that the 2013 legislation would “reduce the deficit by about $160 billion in the first decade and by almost $1 trillion over 20 years” as well as reducing the Social Security shortfall. Too bad the president wasn’t ready to pursue comprehensive immigration reform when he had the political wind at his back in the first years of his administration.

Healthcare reform

Although Republican presidential hopefuls, particularly Texas Senator Ted Cruz and Louisiana Governor Bobby Jindal, are making noise about repealing the Affordable Care Act as a testament to their conservative bona fides, the ACA isn’t going anywhere, and the Republicans know it. However, it is a difficult program in need of improvement that the congressional stalemate, set in place by the likes of Cruz and others, won’t allow. In fact, House Republicans are again at this moment voting to repeal the ACA, though with generally nothing to suggest as an alternative.

In truth, the budget doesn’t call for much in the way of modifications or fixes to the Affordable Care Act, knowing that such a call would be red meat for ACA opponents. Most of the healthcare policy initiatives in the budget focus on bolstering and improving Medicaid and Medicare, which have their 50th anniversaries this year. Worth noting, however, are the budget’s commitments to the nation’s 1,300 federally qualified health centers and 9,000 primary care treatment sites. The budget includes $4.2 billion for health centers to support services for 28.6 million patients, an increase of 1.1 million patients. In addition, there is $810 million in the 2016 budget—and a projected $2.1 billion from 2017 to 2020—for the National Health Services Corps to support 15,000 health care providers “in areas of the Nation that need them the most.” Further, the budget calls for $5.25 billion over 10 years to train 13,000 new medical graduate residents.

What these provisions point out is that expanded health insurance coverage is only good so long as there are health providers willing to serve lower income families and work in underserved areas. Think back to the problem at the VA hospitals; part of the trouble there was the insufficient availability of primary care doctors at VA hospitals, which meant that VA hospital waiting lists got longer and longer, leading administrators to fake lists and cook the books. While solutions were proposed for the Veterans Administration hospitals, no one gave much attention to the inability of the nation’s medical schools to graduate more doctors who were willing to work at VA hospitals. The vastly increased VA budget proposed for 2016 has money for hiring new medical personnel, and the previous budget gave veterans more flexibility in the selection of providers through the Veterans Choice Act. (The VA asserts that this option was underutilized, but the department doesn’t have the numbers to back that up.) Eventually, though, the issue must shift from health insurance coverage, still clearly necessary, to healthcare delivery, including personnel available to respond to needed slots in underserved regions with underserved populations.


Pentagon spending

The president’s budget ends the sequester and consequently restores $37 billion for all domestic discretionary spending and $38 billion for the military. While mindless sequestration was an abdication of legislative thinking in the federal budget process, restoring $38 billion to the Pentagon seems to be caving on the part of the White House to the pressures of John McCain, Lindsey Graham, and others who say that the largest military in the world—almost by a factor of five (over Russia), with over $612 billion as of 2013—suffers from underfunding. It isn’t so. America’s security is fundamentally tied to a stronger economy here at home and economic development and support for democracy abroad, not through marching toward an eventual trillion-dollar Pentagon budget. As long as this nation devotes such an astounding amount to the military, our resources—and our values—will be out of whack.


Humanitarian and development aid

Assuming that military spending is not the only means for America to share its wealth and progress with the rest of the world, nonprofits will be legitimately interested in reviewing what the president’s budget says about foreign aid. Molly Anders, Michael Igoe, and Rolf Rosenkranz write for Devex that the proportion of the president’s proposed budget dedicated to international affairs and development programs amounts to a little over one percent, though that tiny sum will still undoubtedly get plenty of attention from critics inside and outside of Congress who believes that the U.S. does too much for other countries. The big new assistance program, championed by Vice President Joe Biden, is aimed at Central America, doubling aid to Guatemala, Honduras, and El Salvador to help these nations progress economically, deal with their internal safety and security, and hopefully stem the pressures that have brought so many young unaccompanied immigrants to the U.S. Anders and her colleagues note that this plan would make Guatemala the single largest recipient of USAID bilateral development assistance.

The Obama budget also boosts funding for the Millennium Challenge Corp. (MCC), though still below 2007 levels, with a strong emphasis on private sector strategies plus an initiative (Data2x) led by the United Nations Foundation focused on promoting women’s equality and empowerment through better data collection. Likely to also see increases if the Obama budget were to pass will be the Overseas Private Investment Corp., Export-Import Bank, and USAID’s Development Credit Authority, all largely geared to promoting U.S. business overseas. But what goes up is accompanied by programs that go down—a 3.2 percent cut in global health program funding (including an 18 percent cut in funding for the Global Fund to Fight AIDS, Tuberculosis and Malaria), a 20 percent cut in refugee assistance programs (which the budget claims can be supported with carry-over funds from previous years, though how that is enough to address the world’s refugee crisis, which hit a 14-year high of 45 million refugees last year, is not clear), and cuts of 23 percent for the National Endowment for Democracy and ten percent for the State Department’s Democracy and Human Rights Fund.

Focuses for nonprofits

These are all critically important issues to nonprofits and ought to serve as a template for what the nonprofit sector should discuss, debate, and mobilize around, but there is no question that on a narrower basis, nonprofits and foundations will focus on the following:

  • The budget revives the president’s proposal for a 28 percent tax level deductibility cap for very-high-income taxpayers. For charities, that is seen as causing a possible hit on charitable giving. Advocacy groups such as the Alliance for Charitable Reform, a project of the politically conservative Philanthropy Roundtable, refer to a potential loss of as much as $9 billion in charitable giving from the president’s proposed cap—though other, lower estimates rarely get cited in ACR broadsides. The notion that the money saved from charitable deductions of very wealthy taxpayers could be used to fund some of the important initiatives that the president has outlined in the budget proposal is a tradeoff that just doesn’t get addressed and analyzed. In any case, the 28 percent cap proposal has been raised by the president in virtually every year of his administration; it got no traction in Congress but stirred a diverse range of nonprofits to mobilize in opposition.
  • The budget consolidates the two-tiered foundation excise tax to 1.35 percent—but foundations have been advocating for a flat one percent rate. The implicit reasoning is that the lower the excise tax, the higher the amount of money saved, which foundations could and would distribute to grantees as opposed to putting it toward their own administrative costs or adding to their endowments. Conceptually it works, but there is no guarantee at all that the foundations’ moneys would find their way into nonprofit coffers as grants. And, of course, the corollary should be that any excise tax paid should be devoted, as originally intended, to the tax-exempt division of the IRS to pay for oversight. However, there has been little legislative push for that, particularly since the nonprofit sector, to its own detriment, tends to de-emphasize any discussion of strengthening oversight mechanisms at the federal or state levels.
  • Speaking of the Internal Revenue Service, the president proposes to increase the IRS budget to $12.9 billion, including $650 million for “tax enforcement activities that return six times their value in increased revenue.” That nearly $13 billion would be an 18 percent increase over the Service’s $10.9 billion appropriation for FY 2015, which Republicans reduced by $346 million compared to FY 2014 as punishment for the Lois Lerner scandal and specifically tried to gut tax enforcement. While the Service operates on its smallest budget since 2007, it has to cope with new responsibilities under the Affordable Care Act, trying to give the breath of life to the beaten and broken Tax Exempt unit, and attract and retain top flight people to an agency that is detested by Republicans and sadly ignored by Democrats.
  • Nonprofits will be cheered, however, by the budget provisions on the New Markets Tax Credit and the Low Income Housing Tax Credit, both staples for a large number of nonprofit ventures even though national nonprofit industry associations don’t seem to do much to promote or protect them in their advocacy agendas. In the detailed tables on specific program proposals in the budget, there is language that says the administration wants to “modify and permanently extend the New Markets tax credit” ($10.1 billion over ten years) and “reform and expand the Low-Income Housing tax credit” ($4 billion over ten years) It is interesting how the shallower of the two low-income development subsidies—and the one more closely aligned with small business, as opposed to nonprofit development—gets pitched for permanent status, but perhaps advocates can get the housing tax credit into the permanent mix as well.

Overall, the proposed budget looks like a blast that should have come from the past— that is, from the president’s first two years in office, where he had a workable Democratic majority in both houses of Congress and might have been able to get a big chunk of this agenda enacted. For the 2016 budget, nonprofits are probably going to focus on the charitable deduction and the foundation excise tax, which is understandable but politically myopic. When nonprofits went to Congress last year and the year before to protest against possible changes in the charitable deduction, there were almost explicit instructions to the advocacy ensemble not to talk in favor of government spending programs for fear that the coalition would splinter. Actually some nonprofits in the coalition did just the opposite, trashing government funding as less efficient and effective than charitable donations, conveying an impression to less than informed Congress members and their staff that government funding was not all that high a priority to the tax-exempt sector. By virtue of the proposed 2016 budget, it should be clear that focusing on the charitable deduction and ignoring the government funding context around it is counterproductive. 

If it is likely that the president’s proposals stagger and stumble out of the gate, what then does this document mean for nonprofits in real terms? Remember the importance of a budget. It is a statement of the values and priorities of government. The dollars and cents put substance behind some policy rhetoric and reveal the lie behind others.