When passed by the Vermont House in March, H.911: Changes in Personal Income Tax and Education Financing, generated serious concerns for many in Vermont’s nonprofit community. While the bill sought to mitigate the impact of the Federal Tax Cuts and Jobs Act and build on Governor Phil Scott’s proposals to restructure Vermont income taxes, the House Ways and Means Committee introduced a cap of $10,000 on the 5% charitable tax credit proposed by Governor Phil Scott.
- Watch Rep. Janet Ancel (D-Washington), Chair of House Ways & Means explain the thinking behind H. 911 (at 6:40) (Common Good Vermont).
- Here is the easy to read summary of H.911 as passed by the House (Legislative Council).
- Read Legislative Update: Budgets, Vetos and Action (5/2/2018)
Despite the House’s intention to create a more egalitarian giving structure (the tax credit applies to non-itemizers and itemizers alike), many Vermont nonprofit leaders see H. 911 as a disincentive to philanthropic giving that the sector cannot afford. Advocates expressed concerned that the implications of new of federal and state tax policies will create unintended consequences that adversely affect nonprofit revenues.
Looking at the charitable tax credit alone (vs. part of an interlocking bill), sector leaders cited the potential of significant revenue losses in the event that the top 2% of state income giving households found the Vermont policy discouraging to giving. The reality of actual contributions in Vermont is striking: Of the $289 million in charitable contributions that were deducted in 2015, $156 million (54 percent) was given by the top three percent of filers. The top 15 percent of filers contributed nearly 80 percent of the total deducted contributions. The Tax Department (an advocate of the Governor’s no cap proposal) estimates that $360 million in giving could be “disincentivized”.
- Watch John Hollar, DRM lobbyist for the Burlington YMCA outlines sector concerns on H.911 (Common Good Vermont).
- Read Christine Zachai of Forward Philanthropy’s Analysis
Nonprofit leaders’ concerns had an impact on the Senate Finance Committee, which ultimately voted out a revised version of H.911(on 4/30/18) that allows for unlimited contributions to be eligible for the charitable tax credit. It makes up that $8 million expected shortfall by changing the income tax brackets as they were passed in H.911 and lowering the personal exemption (to $4,050 vs. $4,150 in the House passed H.911).
- Watch Senate Finance deliberate the Charitable Tax Cap on 4/27/18 – ORCA Media
- Summary of Senate Finance Committee changes to H.911
- Marked-up version of H.911 voted out of Senate Finance 4/30/18
- Read all of the testimony and supporting material considered by Senate Finance.
Despite the action by Senate Finance, Chair Anne Cummings (D-Washington) anticipates a “long road ahead.” H. 911 also includes a proposal for education financing which remains unsettled. The marked-up version of H.911 now goes to Senate Appropriations. All changes are expected to be negotiated in Conference Committee and further negotiated with the Governor. The outcome of the charitable tax deduction remains to be seen.
For those following this issue, it is helpful to have the legislative background on H.911. Earlier in February, Governor Phil Scott released details of his tax reform plan, the Working Family Taxpayer Protection Act, to ensure “Vermonters don’t see a surprise $30 million tax increase due to changes in federal law”. The Governor’s proposal uses Adjusted Gross Income (AGI) as the basis for calculating Vermont household income tax, creates a personal tax exemption ($4,000), lowers tax rates, and introduces tax exemption for social security benefits (over three years).
Importantly for the nonprofit sector, the Governor proposed a five percent tax credit for charitable contributions in place of a tax deduction, available to all filers (including those households that opt for the standard deduction) with no cap.
Why Did the Governor Introduce the Charitable Tax Credit? The Legislature’s Joint Fiscal Office estimates that households that itemize their deductions will decline from 30% to 10%. Governor Scott said: “The large increase to the standard deduction and shift away from itemized deductions at the federal level might discourage many filers from donating to charity. This measure will re-incentivize charitable giving, make the benefits of giving available to all Vermont taxpayers (whether or not they itemize their deductions at the federal level), and strengthen the connection between Vermont charitable organizations and all members of the community.”
- Here is an assessment of impact to Vermont taxpayers of the Federal Tax Cuts and Jobs Act (Vermont Tax Department).
- Here is an estimate of how federal and state tax liabilities will change with the Federal Tax Bill (Joint Fiscal Office).
- Here is a summary of estimated tax liabilities if no action is taken by the Vermont Legislature (Joint Fiscal Office).
In response, the House Ways and Means Committee repurposed the Governor’s proposals into H.911: Changes in Personal Income Tax and Education Financing, which was voted out by the House in early March. In addition to its proposal on education financing, the House made a number of important changes to the Governor’s income tax proposal, including capping eligible charitable contributions at 5% of $10,000, increasing the personal exemptions to $4150, lowering tax brackets (by .2%) and introducing 100% social security tax exemption.
Senate Finance Committee made changes to H.911 (detailed above) and have referred the bill to Senate Appropriations.
Senate FInance H.911 Proposal 2: