The next really big battle for the nation’s policymakers is tax reform. It won’t be quick or easy. It might not even happen in this Congress, but the gears have begun turning. Gucci Gulch lobbyists are already hard at work selling their wares to members of Congress, and if you listen to the statements of President Barack Obama, House Speaker John Boehner, Senate Majority Leader Harry Reid, and Senate Minority Leader Mitch McConnell, they all seem to say they want tax reform via cutting “loopholes,” whatever they might be. At least both sides are pledging to take aim at the same thing, even though there is a wide variance in the specific “loopholes” they have in mind.
Where does the nonprofit sector stand in the extended scrum of debates and negotiations about comprehensive tax reform? Moreover, what might the nonprofit sector want to say? In this edition of the Cohen Report, I offer some ideas about facets of a comprehensive tax reform platform that the nonprofit sector might want to consider thinking about, supporting, and advocating in the charities’ moments of face time with members and staff on Capitol Hill.
1. Be Prepared to Weigh in on More than Issues of Charitable Giving
Whether or not the charitable tax deduction slips back into the tax reform debate, the nonprofit sector’s focus on the deduction—to the exclusion of issues such as tax equity, social safety net funding, and the sequester—has made charities look like just another interest group that focuses on a narrow set of self-interested priorities while saying to hell with the bigger societal issues. The relatively sanguine approach of much of the sector to the domestic budget cuts in the sequester came across as almost tone-deaf. As some budget advocates have noted, while it was relatively easy to get nonprofits to sign onto opposing President Obama’s 28 percent cap, it has been tough sledding to get anywhere near as broad a consensus of nonprofits speaking out on the sequester.
Moreover, while this wasn’t the intent of the broadest consensus of the nonprofit sector, the charities’ strident opposition to limitations on deductibility for the top taxpaying brackets made it sound to some as if nonprofits were defending the privileges of wealth. This impression was furthered by the outsized influence of conservative nonprofit activists who added their concerns about the “demonization of the rich” to their opposition to the 28 percent cap. This time around, nonprofits must speak up for the interests of the communities that they serve, which means extending their gaze beyond the tax treatment of donations to 501(c)(3) entities.
2. Take a Trans-partisan Approach, But Don’t Expect Political Unanimity
Even though polls suggested that the majority of nonprofit workers favored Obama’s election in 2008 (and perhaps in 2012 as well), that doesn’t mean that the president always took positions that nonprofits liked during his first term in office. The president’s four years of pitching the 28 percent deductibility cap is the most obvious example, but there are many others. Nonprofits were none too pleased with the president’s early attempt to slash the Community Services Block Grant, his effort to cut the capacity-building training money built into the Kennedy-Hatch legislation, and his initial omission of nonprofits in the employers’ health insurance subsidies. Despite the large degree of electoral enthusiasm for Obama, nonprofits also disliked his proposal (unfortunately accepted by Republicans in Congress) to put social safety net programs on the sequestration chopping block as well as the fiscal cliff deal’s deathblow to funding for nonprofit health insurance cooperatives.
Sometimes you want to stick with whoever brought you to the dance, but it might be good to tell them when they’re stepping on your toes or kicking you in the shins. Entering the fray of comprehensive tax reform, nonprofits shouldn’t be too closely aligned with one party or the other, especially since both have their favored special interest tax loopholes that they’ll protect, no matter what they say to the Washington Post and the New York Times. Staking out tax reform turf that makes sense as opposed to being seen as a factotum for one party or the other should be the guiding principle—so long as nonprofits realize that in tax reform, there are always winners and losers. We need to acknowledge that some interests are not going to be happy if, for example, their private jet and yacht tax incentives get cut.
3. Educate the Pols about Loopholes
The starting point of bipartisanship between the White House and Congress is a their shared concern with “loopholes.” But what is a loophole? Rather than debating how sacrosanct the charitable deduction is, nonprofits should be developing a frame for the nation for identifying and weeding out tax loopholes. Such a frame should arouse the public to agitate against tax code policies that protect unfairness.
From our vantage point, tax loopholes are largely the creation of powerful lobbyists representing well-heeled individual and corporate clients. While it is possible that loopholes might enter the tax code in error, mistakes and ambiguities in drafting are usually addressed in technical corrections bills. Loopholes are, for the most part, intentional. There might be an argument to be made in favor of loopholes. Yes, tax incentives for oil and gas drilling can help boost domestic production. Yes, the accelerated depreciation tax break for NASCAR racetrack owners may help them compete against more heavily subsidized football and baseball stadiums. But eventually these provisions show themselves to be loopholes: they cost plenty in federal revenues while generating little to no societal benefit. Instead, the bulk of the benefit flows to private interests that hardly seem disadvantaged.
Take the NASCAR benefit. That was saved from extinction in the fiscal cliff deal not simply because of the plight of racetrack owners, but because of top flight lobbying (with former legislators in the mix) by the National Motorsports Coalition and heavy electoral donations. What makes the NASCAR tax expenditure a “loophole” in contrast to, say, the Earned Income Tax Credit (EITC) and the exclusion of Medicare benefits? The Medicare-dependent elderly and the working poor receiving the EITC really do live and die on these tax expenditures. It’s a judgment call, of course, but if legislators can’t differentiate between incentives to help someone run a racetrack and helping someone afford life’s basics, what did we elect them for?
4. Establish Principles about Tax Reform
We suspect that special interests such as the Beer Institute, which is fighting against increases in beer taxes, the National Roofing Contractors Association, which is looking for accelerated depreciation on commercial roofs, and the U.S. Cattlemen’s Association, which is advocating for a special capital gains rate for retiring ranchers, aren’t taking a particularly enlightened view of the tax reform process. While they may not put it in these words, most are pretty realistic about the fact that they are looking for a loophole for their clients and members. Nonprofits won’t come anywhere near matching the financial muscle of these special interests, so they have to lay out an agenda that elevates the issues at play in tax reform and appeals to the best ideals of the American electorate. The charitable sector ought to be taking this opportunity in the political interregnum to articulate principles of tax reform and use those principles as a yardstick not only for the evaluation of proposals coming from other sectors, but as benchmarks for the advocacy positions of the nonprofit sector itself. Drawing on other plans that have been released in recent years, without necessarily suggesting that their recommendations were complete and worthy of full support, some clear principles should be part of the nonprofit sector’s tax reform framework:
(a) Protect the disadvantaged: Not only should the social safety net not be harmed in the course of tax reform, it should be strengthened. If nonprofits can’t make this their first and foremost threshold position in tax reform, then they might as well give up and exempt themselves from a voice in the critical issues of the day.
(b) Strengthen the economy through jobs: Tax reform shouldn’t undermine the nation’s tentative economic revival when 12 million Americans are unemployed, including 4.8 million considered long-term unemployed. Tax reform has to induce more hiring and better wages, not the kind of economic revival represented by the stock market’s glee in higher profits and higher productivity with less workers.
(c) Make government work better: Some legislators and lobbyists have advanced an agenda of strangling government to the point of impotency and uselessness. Tax reform should acknowledge that some decisions belong in the public sphere and seek to cement them there rather than leaving national priorities to the decisions of private, tax-incentivized actors. At the same time, tax reform can help government be more productive and effective, as it should be.
(d) Protect and strengthen Medicaid, Medicare, and Social Security: Rather than reversing the New Deal, tax reform should aim to strengthen the long-term sustainability of these critical programs.
(e) Support and strengthen health insurance and healthcare reform: Hospitals and other primary care facilities—over 43,000 nonprofit institutions in toto—account for more than half of the revenues and expenses of all public charities. Charles Boustany (R-La.) and others have made plain their intention to use tax reform as a means of undoing components of the Affordable Care Act, or what they call “Obamacare.” However, strengthening—not undermining—healthcare reform has to be a bulwark in the nonprofit sector’s tax reform agenda.
(f) Reduce defense spending: The U.S. defense budget is mammoth, larger than the cumulative military expenditure of the next 13 most weapons-happy nations in the world. The U.S. is strong when its economy is strong, when unemployment is low, and when social inequities are reduced. Except for a small coterie of nonprofits, the nonprofit sector is not about warfare. This is one principle around which nonprofits should coalesce even if Republicans and Democrats don’t find common ground.
(g) Increase revenues: Exacerbated by the end of the American Recovery and Reinvestment Act stimulus spending, sequestration is only the latest in a cascade of federal budget cuts that have whacked the poor in recent years. There’s no more give to be had. And that requires the nonprofit sector to address the revenue question. There is some indication that there is a willingness within the sector to do so. Since the George W. Bush administration, a pretty solid majority of the nonprofit sector has been in favor of reviving and retaining the estate tax, partly for its impact in generating charitable bequests, but more importantly for revenue and equity purposes. Others have mentioned the attractiveness of a financial transactions tax (FTT), endorsed by the likes of Joseph Stiglitz, John Bogle, Jeffrey Sachs, David Stockman, Mark Cuban, and Dean Baker—the idea being a tax so small that it would look like little more than a tiny rounding error on stock trades but that, replicated over and over, would add up to sizable federal revenues.
You can see pieces of this agenda embedded in the Bowles-Simpson report and the Rivlin-Domenici report, among others. While the plans’ omissions and commissions left some of the principles hanging, and while both have issued “2.0” versions that seem a little more focused on political expediency, their core values are worth tapping and articulating as nonprofits enter the tax reform fray.
5. Prepare to Weigh in against Loopholes for Special Interests
Can the nonprofit sector operationalize these principles to weigh in against egregious tax loopholes? If nonprofits can lay out the definitions of loopholes and articulate a platform of guiding principles for tax reform, then they can and should participate in the substance of tax reform, just as they did in overcoming the Bush administration’s plan to kill the estate tax. Certainly some corporate interests will feel gored or betrayed, just as some wealthy families did in regards to advocacy for the estate tax. That’s to be expected. Still, there are obvious candidates for well-intentioned nonprofits to highlight as examples of unfair loopholes to be closed, such as:
- Halting the use of shell corporations in off-shore tax havens (countries or territories with little or no corporate taxes) for the purpose of tax avoidance by U.S. corporations, as well as other forms of overseas tax evasion;
- Preventing investment fund managers from paying taxes on their income at the capital gains rate under the guise of income received as “carried interest;”
- Nixing corporate deductions for moving jobs overseas;
- Eliminating the oil and gas exploration and drilling tax credits;
- Reducing the mortgage interest deduction for high income taxpayers and eliminating the mortgage interest deduction on second homes—or even replacing the mortgage interest deduction with a Simpson-Bowles-like homeownership tax credit;
- Closing the corporate deduction for stock options;
- Getting rid of the tax breaks on personal jets and yachts; and
- Moving the capital gains tax rate to approach or equal the rate for ordinary income.
There are actually dozens if not hundreds of relatively unknown tax breaks that could be examined under the rubric of increasing fairness, enhancing tax equity, and generating new revenues on the parts of those who can and should pay. Whatever the proposal, it is imperative that we do not pitch tax reform as aimed primarily at eliminating the deficit. Most people don’t get the deficit and most politicians misuse and abuse it as a political scare tactic. Tax reform is about generating fairness in the tax code and ensuring that taxpayers—individuals and corporations—who should pay actually do. It is an issue worth pursing whether the federal budget is in the black or in the red.
6. Put Charitable Giving Reform Back on the Table
It is unlikely that the political powers that be are going to take aim again at the charitable deduction even if there are reasonable arguments in favor of the president’s 28 percent formula and indications that its impact on charitable giving would have been relatively minimal. Between the inclusion of a higher top tax rate and the extension of the IRA charitable rollover, the fiscal cliff deal actually ended up yielding a projected increase in charitable giving. That doesn’t mean that charities should breathe a sigh of relief that they dodged a bullet. Laying low is not a credible strategy. Looking at options for improving the operation, oversight, and fairness of the charitable deduction should be part of the nonprofit sector’s platform at the tax reform table. One option on the table could be the notion of a floor for charitable deductions of one percent to 1.7 percent of adjusted gross income, as proposed in a paper by Roger Colinvaux, Brian Galle, and Eugene Steuerle. At a House Ways and Means Committee hearing last month, Steuerle also advocated for limiting the deductibility of in-kind gifts such as clothing and household goods because of patterns of overvaluation, opportunities for abuse, and the large part of the donations retained as income by intermediaries.
At a program sponsored by the Urban Institute, Jane Gravelle of the Congressional Research Service—making clear that she wasn’t speaking for CRS—suggested that there might be an issue to investigate regarding donors who put their contributions into donor-advised funds, university endowments, and foundation endowments, since these donors receive the full value of the charitable deduction immediately even though the funds are expended slowly over a long period of time. Establishing payout rates for university endowments, for example, might be an improvement in charitable flows, as might an increase in foundation payout rates, long advocated by the National Committee for Responsive Philanthropy.
Whatever the specific idea, putting charitable incentives on the table for discussion in the context of broad tax reform is not an act of nonprofit self-immolation. Rather, it is a recognition that the entire tax code merits review to determine how it can work better for people in need. Returning to the principles of tax reform outlined above, nonprofits have to remind themselves that the first principle of tax reform should be to protect and support the disadvantaged and the poor. That was the challenge explicitly laid out at the Ways and Means Committee hearing last month by Rep. Charles Rangel (D-N.Y.) and Rep. Xavier Beccerra (D-Calif.). Can nonprofits answer that challenge by participating in comprehensive tax reform to improve the lot of lower income families and individuals? This is the time to find out.