Nonprofit Industry Groups Send Legislative Wish Lists to Tax Writing Committees
This must be the season for legislative wish lists because at least three nonprofit groups conveyed their legislative desires to the Congressional tax writing committees last week. The American Council on Education’s October 15, 2024 letter includes these recommendations:
Repeal or Reform the Excise Tax on Investment Income of Private Colleges and Universities
The Tax Cuts and Jobs Act imposed an excise tax on investment income (known as the “endowment tax”), primarily on the charitable resources at certain private nonprofit colleges and universities. This tax undermines the teaching and research missions of the affected institutions without doing anything to lower the cost of college, enhance access, or address student indebtedness. We opposed this tax at its implementation and continue to strongly urge the Committee to repeal it.
While college and university endowments differ in size, structure, and organization, their broad purposes are uniform: to advance an institution’s charitable mission to expand and enhance educational and research opportunities and programming that benefit the public good. Additionally, while the current and potential institutions subject to the tax are diverse— from liberal arts colleges to research universities to stand-alone medical schools—they all share a tremendous commitment to student financial aid and access. In fact, many have led the nation in providing debt-free access to low- and middle-income students, relying heavily on institutional and endowment resources. Currently, about two-thirds of endowment spending is allocated to boosting financial aid and academic programs.
The endowment tax takes money directly away from student financial aid, teaching, research, and numerous other mission-focused activities. It also undermines institutional philanthropic efforts to further expand generous financial aid offerings for students and support excellence. Unfortunately, more institutions are facing the impacts of the tax; the two years of Internal Revenue Service data on the tax show the number of covered institutions increased by about 76 percent from one year to the next. We strongly believe the Committee should repeal this tax or reform the tax in ways proposed by then-Ways and Means Member Rep. Brendan Boyle (PA-02) in H.R. 5152, the Higher Education Endowment Tax Reform Act (117th Congress), which would mitigate the effect of the tax on covered institutions that choose to devote more resources to student financial aid.
Also on October 15, 2024, the National Conference of Nonprofits submitted its list of legislative priorities which include:
Preserve Nonprofit Nonpartisanship
1, First, Do No Harm: Charitable nonprofits – 501(c)(3) organizations – are steadfastly nonpartisan in law, fact, and purpose, not just because the third proviso of Internal Revenue Code Section 501(c)(3) requires it, but also because nonpartisanship is essential to public trust and organizational impact in communities. Charitable nonprofits call on Congress to preserve that longstanding law, sometimes called the “Johnson Amendment,” without amendment or alteration.
2. Reinstate and Expand a Non-Itemizer Deduction to ensure all taxpayers, including those taking the standard deduction, can receive a charitable tax incentive for giving back to their communities.
3. Retain the 60% AGI Cap on charitable deductions to increase giving by those [who] itemize.
Independent Sector’s October 15th letter includes recommendations regarding the charitable contribution deduction and maintaining the Johnson Amendment:
Recommendation: Give every taxpayer access to the charitable deduction by making it available to those who do not itemize their tax returns Giving every taxpayer access to the charitable deduction would more than mitigate the negative impacts of TCJA on giving and create millions of new donors in the short term.8 In the long term, those new donors would build and reinforce the pipeline of American generosity. Regardless of total funding levels, it is critical that our civil society be funded by the broadest possible segment of the population. A nonprofit sector that is funded only by the wealthy will be less grounded in the communities it intends to serve. When considering these policy options, it is essential to remember the uniqueness of the charitable deduction in our tax code. The true “beneficiary” of the deduction is not the individual who gives away their own income; it is the person or the community that receives charitable services as a result. As an active member of the Charitable Giving Coalition, Independent Sector strongly supports legislation that would expand access to the charitable deduction, including the Charitable Act.
The Tax Code Should Strengthen Nonpartisan Advocacy and Civic Engagement for the Nonprofit Sector
Recommendation: Maintain the absolute prohibition on political campaign activity for 501(c)(3) nonprofit organizations
A healthy nonprofit sector requires a healthy democracy. Because of their charitable mission and deep connection to those they serve, nonprofit organizations are uniquely positioned to help communities lift their voices and advocate for what they need most. In fact, voters who are contacted through nonpartisan civic engagement by nonprofit organizations are 10% more likely to vote than comparable voters who are not contacted. While there are many factors that contribute to this response, perhaps foremost among them is the nonpartisan nature of the outreach and the organization conducting it. In fact, since 1954, the definition of a charitable nonprofit organization has explicitly excluded any organization that would “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.” This prohibition is often referred to as the “Johnson Amendment” for its sponsor, then-Senator Lyndon Johnson (D-TX), although it cleared Congress without objection and was signed into law by President Dwight D. Eisenhower.
The prohibition on political campaign activity serves as a critical firewall, protecting the nonprofit sector from an often bitter and divided political landscape. Nonprofit organizations have an important role to play in bridging differences and bringing Americans together, but they cannot play this role effectively if they themselves are captured by political partisanship.
Additionally, nonprofits would face major operational challenges if they were forced to choose between endorsing a candidate they believed would support their mission and a sitting elected official with sway over their budget. Regardless of their actions, perceptions of political partisanship would undercut nonprofits’ trusted status and render much of their work more difficult or impossible. Simply put, eliminating or weakening the prohibition on political campaign intervention would represent an existential threat to the nation’s nonprofit sector. In addition to damaging the nonprofit sector, eliminating the prohibition on political campaign activity would further corrupt the American political system. Because contributions to charities are tax-deductible, this would effectively require the U.S. Treasury to subsidize political donations. This cost is not mere conjecture: In 2017, the Joint Committee on Taxation estimated that a proposed weakening of the “Johnson Amendment” would cost taxpayers $2.1 billion over the following decade. This implies that at least $6 billion in otherwise taxable political campaign contributions would be converted into de facto tax-deductible campaign contributions. The right to free speech is enshrined in the U.S. Constitution, but there is no such right to tax-free speech.
Recommendation: Consider opportunities to clarify or provide further guidance on what constitutes prohibited “political campaign intervention.” In addition to preserving the firewall between charitable nonprofits and political campaigns, it is equally important that nonprofit organizations be engaged in the public policy process through permitted activities such as advocacy, lobbying, and nonpartisan civic engagement. Public policies designed without the input of nonprofits and the people they serve are less effective, and our democracy is less representative when nonpartisan civic engagement is curtailed. As we noted in greater detail responding to a Ways and Means Committee request for information last year, recently released research demonstrates an alarming decline in nonprofit organizations’ engagement with public policy. In 2022, only 25% of organizations reported that they had ever communicated a position on legislation to policymakers, as compared to 74% that reported ever having done so in 2000. Regardless of whether they engaged with public policy or not, nonprofit organizations self-reported that “tax laws or IRS rules” were the single most discouraging factor influencing their decision about whether to engage.
This research is borne out by the experiences of Independent Sector, its members, and even IRS officials themselves in a recent Government Accountability Office (GAO) report. Independent Sector is proud to support the Nonprofit Stakeholders Engaging and Advancing Together (Nonprofit SEAT) Act (H.R. 3245), introduced by Rep. Nancy Mace (R-SC) and Rep. Betsy McCollum (D-MN), and currently endorsed by nearly 700 nonprofit organizations across almost every state. Section 10 of that legislation directs the GAO to issue a report to Congress on opportunities to clarify the difference between prohibited political campaign intervention and nonpartisan civic engagement for 501(c)(3) nonprofit organizations. We also encourage you to examine the Bright Lines Project — a nonpartisan initiative undertaken by a drafting committee of technical and legal experts — aimed at developing a framework of clear analytical steps that could be used by regulators and nonprofits alike.
darryll k. jones