There’s a lot at stake for tax-exempt organizations in the current proposals for tax reform.
The Charitable Deduction. In 2014, individuals contributed $258 billion to charity, more than 80% of which was donated by persons who itemized deductions and claimed a charitable contribution deduction. President Trump’s tax reform plan and the House Blueprint would substantially reduce the percentage of taxpayers itemizing their deductions, from a current 30% to as low as 5%, and would cap the total value of itemized deductions for those who still claimed them. The Charitable Giving Coalition, among others, is concerned that these changes would reduce the value of charitable giving and curtail charitable contributions. Its proposal is to allow an above-the-line charitable deduction for all taxpayers. (For a fuller discussion, see Roger Colinvaux’s “The Importance of a Participatory Giving Incentive,” 2017 TNT 29-8, available here.)
The Johnson Amendment. In 1954, then-Senator Lyndon B. Johnson took umbrage at the vocal support a tax-exempt organization had given to his opponent in that year’s Democratic primary. Under an amendment that he offered from the floor of the Senate and that was incorporated into the Internal Revenue Code of 1954, section 501(c)(3) organizations, including churches and other religious organizations, cannot “participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.” Over the years, a number of groups have sought to repeal this amendment on the ground that it restricts the freedom of speech of churches and religious organizations.
In his address to the National Prayer Breakfast in February President Trump promised to “get rid of and totally destroy the Johnson Amendment and allow our representatives of faith to speak freely and without fear of retribution.” (President Trump made a similar promise as a candidate in September 2016.) A full repeal of the Johnson Amendment would permit charities and religious organizations to endorse candidates and participate in political campaigns without risking their tax-exempt status. Perhaps more significantly, a full repeal would permit taxpayers to make tax-deductible donations to political campaigns through politically active charities and religious organizations. Some churches and tax exempt organizations welcomed the President’s proposal. Others have expressed concern that involvement of charities in political campaigns, especially without significant limits such as those governing lobbying activities, could undermine public trust in charities.
Destination-Based Cash-Flow Tax Regime. The proposal in the House Blueprint to replace the corporate income tax with a destination-based cash-flow tax (DBCFT) raises questions regarding tax-exempt organizations. The DBCFT, as a quasi-consumption tax, would arguably place a burden on tax-exempt organizations that purchased goods or services from corporations taxable under the DBCFT. Consumption-based tax regimes use a number of means to effect tax exemption. In the United States, tax-exempt organizations are generally exempt from sales taxes. In a Tax Analysts article entitled “VAT Treatment of Nonprofits and Public-Sector Entities,” Pierre-Pascal Gendron discusses how VAT systems have treated exempt organizations. Some countries provide an exemption from VAT for sales of goods and services to exempt organizations. Others provide for a refund of VAT to an exempt organization that does not itself make taxable sales. It remains to be seen whether tax-exempt organizations would be carved out of a DBCFT regime and, if so, by what means.