While a new House Republican-supported federal tax bill is said to be unlikely to move forward in the Senate, its predecessor and some of its ideas are sounding alarms among national debt watchdogs—and local nonprofit leaders.
The first round of tax cuts, the “Tax Cuts and Jobs Act” passed along party line in December 2017, caused consternation among nonprofit leaders. It nearly doubled the standard deduction—which nonprofit leaders and scholars worried would reduce incentives for making donations.
Loudoun already has below-average rates of charitable giving.The most recent study of giving by the Chronicle of Philanthropy reviewed spending in 2015, finding Loudouners gave 1.9 percent of their taxable income. That equates to a median gift of $3,685. Their generosity lagged behind nearby counties and the state average of 2.9 percent.
Community Foundation for Loudoun and Northern Fauquier Counties President Amy Owen said the difference between Loudoun’s charitable giving and the state average equates to about $70 million not flowing into local nonprofits. “That’s a lot.”
With the standard deduction nearly doubled, Owen said, there’s less reason to itemize deductions such as donations to nonprofits.
“Unless your charitable giving and other pieces of your tax deduction exceeds $10,000, there’s no immediate reinforcement for making that gift,” Owen said. She pointed to estimates that compared to about 30 percent of taxpayers itemizing deductions today, the higher standard deduction could mean only 5 to 12.5 percent of taxpayers will itemize deductions.
“So the concern is that those individuals who fall into the new standard deduction limits will be less enthusiastic about making charitable gifts,” Owen said.
And she said the new round of tax cuts, the “Protecting Family and Small Business Tax Cuts Act of 2018,” which makes some of the temporary tax changes in the 2017 bill permanent, could make the problem worse.
The IRS is also considering new guidelines that would subtract state tax credits for a donation from the eligible deduction from federal taxes. Owen said that could impact programs like Virginia’s Education Improvement Scholarships Tax Credits Program, which provides tax credits for people donating to qualifying scholarship foundations; the Neighborhood Assistance Program, which provides state tax credits for donating to organizations that support low-income people; and the land preservation tax credit, which is credited to people who donate land or conservation easements.
In the Neighborhood Assistance Program, for example, people making donations can receive a state tax credit for 65 percent of the donation. But only the remaining 35 percent of that donation would then be counted toward a federal tax deduction.
Critics of the state programs have said they are a way around the Tax Cuts and Jobs Act’s $10,000 cap on deducting state and local taxes.
The bill could also impact wealthy givers. The new tax bill proposes a second round of cuts to the estate tax, a tax on passing down estates of the deceased of $11.18 million or more in 2018. The estate tax allows a deduction for charitable bequests.
But there is debate around how direct of an impact tax policy has on charitable giving.
A 2010 study by Merrill-Lynch found 67 percent of wealthy donors said they would somewhat or dramatically decrease their donations if deductions for charitable giving were eliminated, which the American Institute of CPAs wrote in 2017 illustrates the “understated impetus” of tax considerations for charitable giving. The institute wrote a higher tax rate favors people who make large contributions because it gives them larger tax deductions.
But James Snyder of Yount, Hyde and Barbour CPAs and Consultants said, while he expects to see a change, he doesn’t expect it will be drastic.
“From a psychological standpoint, it never makes sense to give a buck to save 40 cents,” Snyder said. “And that’s really what is happening here. People are giving out of altruistic intent.”
Synder, who also serves with the Loudoun County Chamber of Commerce, the Loudoun County Salvation Army and the Loudoun Small Business Development Center among other community organizations, said there may be a change in strategy. For example, he said, with the higher bar to itemized deductions, middle-income people whose tax situation is most affected by the changed standard deduction may choose to bunch two years’ worth of giving into one year.
“We may be seeing larger gifts come in because people are trying to donate once during the year, or twice during the calendar year, to double up on their typical donations,” Snyder said. “And then rest the other year and take the standard deduction.”
The biggest impact, he said, may be felt in the largest gifts.
“My biggest concern is, the change in the credit amount in the Neighborhood Assistance Credit, in particular, may dissuade people from making these larger gifts,” Snyder said.
The Deficit Hole Gets Deeper
Under the 2018 tax bill, according to the Congressional Budget Office, the national debt is on track to reach 100 percent of gross domestic product by 2028—“far greater than the debt in any year since just after World War II.” By 2048, the debt is projected to reach 152 percent of GDP, “the highest in the nation’s history by far.”
While the budget office estimated the first round of tax cuts would add $1.5 trillion to the national debt over 10 years and push more income into higher tax brackets, “tax reform 2.0” or the “Protecting Family and Small Business Tax Cuts Act of 2018” is expected to tack another $631 billion on top of that. Congress’s Joint Committee on Taxation estimated the bill would grow GDP by 0.1 percent, bringing in about $93 billion from 2019 to 2028, but overall would cost the federal deficit about $631 billion over that time.
Many of the tax reductions in the Tax Cuts and Jobs Act were set to expire by 2025, in part to avoid needing a 60-vote supermajority in the senate to pass them. The new tax bill would make the individual tax cuts permanent, and is not expected to move in the Senate, since it would require 60 votes.
U.S. Rep. Barbara Comstock (R-VA-10) under repeated questions would not defend the bill’s debt impact. Instead, she said it is meant to reshape the economy.
“I think you’re trying to structurally create an economy that grows the middle class, grows and supports innovation,” Comstock said. She pointed to the American economy’s rapid growth, which in the last quarter showed 4.2 percent gross domestic product growth.
“We are seeing this boom in the economy, and certainly opportunities here locally like we’ve never seen before,” Comstock said. And she said the tax bills encourage innovation and research and development.
“Innovation and a growing economy are going to be the fastest way to shrink the budget deficit, and they’re going to be a way to deal with legacy costs, Medicare, Medicaid,” Comstock said
During a debate with her challenger, state Sen. Jennifer T. Wexton (D-33), in October, Comstock did not address the Tax Cuts and Job Act’s impact on the federal public debt, instead shifting to the state budget, which she said would benefit.
The Protecting Family and Small Business Tax Cuts Act passed the House of Representatives 220-191 on Sept. 28, supported by 217 of 236 Republicans and opposed 181 of 193 Democrats. 10 Republicans opposed the bill, three Democrats supported it, and nine of each party were listed as not voting.