Impact of Federal Tax Changes on Vermont Social Sector Discussion 1/15/18

Last week (1/15/18) several nonprofit leaders sat down with Common Good Vermont and Public Assets Institute’s Paul Cillo to discuss the implications of federal and state tax and budget policy on Vermont nonprofit organizations.

The stock market is chasing 26,000 at the same time that income inequality is growing in Vermont. According to the State of Working Vermont 2017 (published by the Public Assets Institute), since 2009, 50% of the income gain has accrued to the top 1% of Vermont taxpayers. They project that:  

The Republican tax overhaul—an historic redistribution of wealth to the already wealthy—promises to make life harder for low- and moderate-income Vermonters. That legislation is based on one soundly disproven theory: that income tax breaks, corporate tax loopholes, and relaxed regulation free up capital for businesses to invest, creating more jobs, higher wages, and a stronger economy, lifting all boats. Each time this theory has been put into practice, it has accomplished only one thing: made the rich richer.

While recognizing that “income not taxes are the issue”, Public Assets seeks to make Vermont’s tax system more progressive.  Pertinent to Vermont’s social sector, elimination of charitable (and other) deductions are central to this strategy, designed to ultimately lower rates for all tax payers.

Vermont may see a $38 million bump from Trump tax cuts. Economists for the legislature and the governor’s office say the state might see a $29.7 million increase in the General Fund for fiscal year 2019 and an $8.1 million increase over prior forecasts in the current fiscal year as a result of the recently-passed federal tax bill. But they caution there is great uncertainty in analyzing the impact of the federal cuts on the Vermont tax base and on individual taxpayers. The analysis was part of the consensus revenue forecast presented this week in several committees.

More than a third of Vermont’s budget comes from federal funds. Seventy five percent of the state budget is dedicated to education and human services. The federal budget is expected to be cut in FY20, putting further pressure on the State government’s ability to deliver services in Vermont.

This is no suprise to Vermont’s charitable sector, which has seen its state contracts shrink over the past 25 years, leaving organizations to meet community needs and subsidize the work of the state with increasing philanthropic support. At Spectrum, for example, since 2010, state funding has decreased from 98% to 48% of revenue since 2010.

This fraying of the Vermont social safety net has been offset, in part, by federal and state tax policy which provided incentives tax payers in most brackets to give–important signals from the government that charitable giving is to be encouraged.

According to the National Philanthropic Trust, 72% of national charitable giving comes from individuals. It is also true that the majority of these funds come from the top echelon of donors. The top average annual giving from high net worth individuals is $25.5K and from “general population” donors it is $2,520. In the case of Spectrum, 66% of funds come from 2% of the donors. Itemized deductors typically contribute in the form of appreciated stock, retirement account distribution or through donor advised accounts.

As we discussed at our meeting, any change in tax policy will have an impact on charitable giving in Vermont. Chico Lager, Flynn Board member: “Tax policy factors into what people give. It would not affect their core decision but it affect the dollar amount they give.”

“Fair Tax Act of 2017” doubles the standard deduction for individuals (to $12,000), couples (to $24,000), and heads of households (to $18,000) and raises the limit on cash donations for those who itemize deductions to 60% of adjusted gross income (AGI), up from the current 50% of AGI.

According to the National Council of Nonprofits:

As a result of the change, the charitable deduction would be out of reach of more than 90% of taxpayers. The Joint Committee on Taxation (JCT) estimates that itemized deductions will drop by $95 billion in 2018. Not all of this would disappear; the change is estimated to shrink giving to the work of charitable nonprofits by $13 billion or more each year. Estimates are that this drop in giving would cost 220,000 to 264,000 nonprofit jobs. While the loosening of the AGI limitations for charitable deductions and the eliminating limits on itemized deductions for upper income taxpayers are helpful, the impact would be limited to the few taxpayers who would continue to itemize deductions.

Donor Advised Funds also have an important impact on revenue available to the charitable sector. The statistics bear out that donors are investing in these instruments to gain tax advantage, but not necessarily distributing these funds to nonprofit organizations in a timely manner. Proposals to set time limits on distribution were not included in the federal tax bill. Here is the back up data:

  • Donor-advised funds held $85.15 billion in assets in 2016.7
  • Annual contributions into donor-advised funds were $23.27 billion in 2016.7
  • Donors recommended grants from donor-advised funds totaling $15.75 billion to charities in 2016.7
  • Average donor-advised fund account size was $298,809 in 2016.

The estate tax is an important source of revenue for the work of charitable nonprofits as it encourages donors to address future needs in their communities through estate planning. Estate taxes remain in the new tax bill, but the exemption is doubled to about $11 million for individuals and about $22 million for couples. According the National Council on Nonprofits: Doubling the exemption is estimated to reduce federal revenues by nearly $100 billion over ten years and lower charitable giving by $4 billion per year.

Before we adjourned our meeting, we briefly discussed the huge financial impact of Vermont state government’s unfunded pension obligations ($3.6 billion). The impact of this on state budgets promises to be substantial, and create further pressures to underfund social service contracts. See  Retirement and Healthcare Contributions Dilemma, courtesy of the Vermont Business

These trends and policies will put pressure on the noprofits to deliver more services while government and philanthropic dollars decline. Nonprofit leaders present believe it is vitally important to stabilize nonprofit support at this time of uncertainty. We do not yet have a clear picture on the impact of the new federal tax law, looming federal cuts loom on the horizon, and the bullish financial markets will not last forever.  As we weather these disruptive times, it is important that we “do not discourage philanthropy when we need it most.”

Additional Resources:

  • Here’s a look at how the federal tax rates will affect Vermonters. (VTDigger)

The recently enacted Tax Cuts and Jobs Act (TCJA) has produced widespread changes in the tax law, including many that will affect tax-exempt organizations. View RSM’s recent exempt organization tax reform update podcast to learn more about the final provisions affecting exempt organizations under the TCJA. In addition, RSM’s resource center features the latest in analysis and developments related to the potential effects of the new tax law for exempt organizations.

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