MCF Calls on MN Legislature to Consider Full Impact of Federal Tax Reform

Tuesday, February 27, 2018

What is Minnesota going to do about new federal tax law included changes that were harmful for charitable giving, philanthropy and tax exempt organizations? 

Minnesota's House and Senate tax committees started the work of adapting state law to the federal changes. MinnPost called it a loud start to the legislative session in one article and then dug into the complexities in another.  However, presentations by state Department of Revenue officials and nonpartisan legislative research staff in the House Taxes Committee created the impression that federal tax reform would have little effect on charitable giving and, in fact, produced a positive outcome by increasing the annual allowable cash contribution limit from 50% to 60% of adjusted gross income.  MCF submitted the following letter to House and Senate tax committee members to explain how the new federal tax law is creating problems for charitable giving and tax exempt organizations.

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Minnesota Council on Foundations (MCF) advises the Minnesota Legislature to consider the impact of federal tax reform on charitable giving as it considers adjustments in Minnesota tax law to conform to recent changes in federal taxes. We specifically note the impact of federal adjustments to the estate tax and the value of the charitable giving tax deduction.

Estate Tax

The estate tax provides an incentive for high wealth donors. It encourages donors to address future needs in their communities through estate planning. It stimulates donations to support community foundations, establish trusts, or make legacy gifts for capital improvements or endowments that have long-term, sustaining impact for communities or tax exempt organizations. Federal tax law changes substantially increase the threshold to qualify for the estate tax to $11 million for individuals and $22 million for couples, such that fewer estates will be subject to taxation. This is expected to result in a decline in the number of bequests to charitable organizations.  According to the Independent Sector:

"Weakening the estate tax, by applying it to only a few households, will further reduce giving to charities, possibly decreasing as much as $7 billion. In 2010, when the estate tax was temporarily repealed, gross charitable bequests in IRS tax filings totaled $7.5 billion – a 37 percent drop from $11.9 billion the prior year. The tax returned in 2011 and charitable bequests increased by 92 percent, totaling $14.4 billion."

MCF supports wealth transfer taxes, such as the estate tax and gift tax, with rates and thresholds that balance maintaining a welcoming environment for high wealth Minnesotans with providing incentives for increased charitable giving and consideration for sustaining government’s capacity to be a partner in supporting services that are critical to creating prosperity for all Minnesotans through inclusion and equity.

Charitable Giving Tax Deduction

The charitable giving tax deduction is an expression of how we value of the role of engagement and support for civil society in creating a strong democracy. The new federal tax law retains the charitable giving tax deduction and temporarily increases the limitation for contributions from 50% to 60% of adjusted gross income.  While this may seem like affirmation of policy promoting democratic engagement through charitable giving, when combined with other features in the new tax law the value of the charitable giving tax deduction is actually diminished. 

The effect of the increase of the standard deduction to $12,000 annually for an individual filer will reduce the number of taxpayers taking the itemized deduction, and therefore eligible for the charitable giving tax deduction, from the current 35% to approximately 10%. This effectively limits the benefit of the current charitable contribution deduction and weakens the tax incentive to make charitable contributions, particularly for those who make smaller contributions.  It is worth noting that currently, 31% of all charitable gifts are made during the month of December, with 13% of all gifts made in the last three days of the month. There are many reasons for charitable giving, but the charitable giving tax deduction as previously enacted certainly had the effect of reminding those who may have deferred giving and encouraging others to do a little more.

According to the Independent Sector:

"Under the new tax law, fewer than 10% of taxpayers may choose to itemize and claim the charitable deduction. This shift will cause a $12-$20 billion decline in charitable giving each year. Increasing AGI limits and repealing the Pease limitation will incentivize the few high-income donors that still itemize to give more to charity, but this increase in giving was factored into recent analyses conclusions that charities will see a net loss of $12-$20 billion in giving. The slightly higher levels of giving will not be enough to offset a final bill’s overall damage to charitable giving."

MCF affirms philanthropy and charitable giving as essential expressions of civic engagement in a democratic society that should be valued and promoted through tax policies and regulations. We support and encourage state and federal tax laws that maximize opportunities for increasing charitable giving.

Conclusion

The new federal tax law was not good for charitable giving. The adjustments to the estate tax and those diminishing the value of the charitable giving tax deduction are two examples. Other provisions establish new excise taxes that create greater burdens on tax exempt organizations than their for-profit counterparts, and a dangerous precedent of undermining the principle of tax exemption for public purpose organizations. They add unique cost to doing business as a tax exempt organization.  Finally, they create fiscal pressures that will gaps in the capacity to serve people and communities in need well beyond the current or future resource capacities of nonprofits or philanthropy.

MCF encourages you to consider the impact of federal tax law changes on charitable giving and philanthropy and protect and promote the role we play in sustaining Minnesota’s economy, services for individuals, families and communities, and high quality of life.