We will be taking a break from sending Snapshot through the rest of this year, and will return on Thursday, Jan. 4, 2018. We wish all our readers a safe and happy holiday!
In This Week's Edition of Snapshot
- Tax reform goes to President Trump’s desk for signature
- Congress is up against a tight deadline on government funding agreement
- In the States: Federal tax bill affects state estate taxes
It has been a whirlwind week for tax reform. Last Friday, Dec. 15, the tax conference committee issued a conference report—which provided a single, negotiated version of the House and Senate bills. Congress moved quickly to take this bill to the floor for a vote. The House initially voted to pass the legislation on Tuesday afternoon and sent it to the Senate for approval. However, upon arrival, the Senate Parliamentarian determined that there were three provisions in the bill that were in violation of the Byrd Rule requirements under the rules of reconciliation:
- Expansion of eligible expenses for 529 accounts to include homeschool expenses;
- Exclusion of certain small colleges from the excise tax on university endowments; and
- The short title: “The Tax Cuts and Jobs Act.”
As a result, the Senate had to make last-minute changes to ensure the bill complies with the rules of reconciliation. Working through the night and into the early hours of this morning, the Senate voted 51-48 along party lines to pass the legislation. Given the last-minute changes that were made, the House was required to vote on the new version of the bill—which it did yesterday, passing the legislation by a vote of 224-201.
With passage by both chambers, the bill now awaits signature into law by President Trump. There is some uncertainty as to when the President will sign the bill. Due to a budget rule known as “PAYGO” (which stands for “pay-as-you-go”), the $1.5 trillion cost of the tax reform bill must be offset immediately by cuts in mandatory spending—in this case, Medicare. According to BGov, the President has said that he will wait until next year to sign the bill if signing it this year would trigger such cuts to Medicare. However, if Congress passes a waiver to the PAYGO rules (presumably as a part of the spending legislation that must be passed before Friday—see more below), the President has indicated that he would sign the bill into law this year. The timing of when exactly this happens will impact a number of items that taxpayers will need to make decisions about in short order.
What does this mean for philanthropy?
The final bill includes a number of provisions that will impact philanthropy, including:
- Changes to individual income tax rates;
- Near-doubling of the standard deduction and the failure to enact a universal charitable deduction;
- Changes to itemized deductions and the Pease Limitation;
- Increase of the threshold for the estate tax;
- New rules for calculating UBIT;
- New excise tax on charity-executive compensation; and
- New excise tax on private college and university investment income.
The final bill did not include language on the Johnson Amendment, any changes to the private foundation excise tax, or provisions relating to donor advised funds.
Overall, the impact of this bill will be more detrimental to philanthropy than beneficial. The Council issued a statement yesterday, stating in part:
During a season when families and communities are coming together to find ways to give back and help those most in need, the House and Senate have voted to give Americans tax reform legislation that will increase the need and decrease their ability to help. Today’s passage of the Tax Cuts and Jobs Act will result in a decrease of $16-$24 billion in charitable giving every year, significantly decreasing the philanthropic sector’s ability to provide resources and services to people across the United States and abroad.
However, our fight to enact public policy that strengthens philanthropy does not end with the passage of this tax reform. The Council will continue to fight for a Universal Charitable Deduction, for simplifying the Private Foundation Excise Tax to the desired flat 1% rate, and for allowing IRAs to be rolled over to Donor Advised Funds. We will also remain vigilant against any efforts to weaken or repeal the Johnson Amendment protections that are so crucial to the integrity of our sector.
We will be hosting a webinar for Council members on Thursday, Jan. 4, 2018 to discuss our analysis of the impact of this legislation. See our website for more information and to register.
Tomorrow, Dec. 22, marks the deadline for Congress to pass spending legislation to keep the government open. GOP leaders had planned to push through a bill that would have increased defense spending for a full year and temporarily increased all other spending until Jan. 19, 2018. The agreement also would have funded the Children’s Health Insurance Program (CHIP), as well as an $81 billion disaster aid package. However, during a House Rules Committee meeting on Tuesday evening, it became clear that plan did not have sufficient support to ensure passage.
Discussions for a new plan are currently underway. It seems most likely that the new plan will consist of two separate bills: one CR for all federal spending (including defense) until Jan. 19, and one disaster aid package. The other legislative priorities that some had hoped to tack onto this legislation (i.e. CHIP, deferred action for childhood arrivals (DACA), certain defense programs, Affordable Care Act stabilization measures, etc.) will most likely be punted to early next year in order to avoid a government shutdown.
Republican leaders in the House plan to bring this bill to the floor for a vote today. House Democrats are united in opposition to this plan, so Speaker Paul Ryan (R-WI) will have to pass the bill with only Republican votes. Assuming Speaker Ryan will be able to negotiate support for the bill from some of the most conservative members of his party with an agreement about certain changes in the future, the Senate has pledged to take action on the bill “as quickly as possible.”
Exclusive from our colleagues at the National Council of Nonprofits.
Federal Tax Bill Affects State Estate Taxes
The federal tax bill has yet to be signed and states already have reason to be concerned about how it will affect state tax law and revenues, whether directly or indirectly. The interaction of the federal and state estate taxes is a case in point. Hawai`i, and Maine follow the threshold set in federal law of about $5.5 million for individual estates. New York raised its exemption threshold to $5.25 this year and is currently scheduled to match the federal exemption level in 2019. The District of Columbia is also scheduled to conform its exemption level to the current federal law in the near future. Where state law automatically follows federal changes, the doubling the estate tax exemption, as is done in the Tax Cuts and Jobs Act, will reduce anticipated revenues for those states and likely trigger spending cuts or other tax hikes to close the unexpected budget gaps.
In total, 17 states and the District of Columbia impose an estate tax and/or an inheritance tax (Maryland has both), with tax rates of up to 20 percent. Several states have repealed their estate or inheritance taxes in recent years, including Tennessee (2016), North Carolina and Indiana (2013), Kansas, Ohio, and Oklahoma (2010). The repeal of the estate taxes in Delaware and New Jersey take effect on January 1, 2018, despite ongoing budget shortfalls, reflecting the political pressure to reduce this government revenue source.