PUBLIC POLICY UPDATE - SPRING 2011
Administration Again Proposes Cap on Charitable DeductionsSummary:
President Obama's FY2012 Budget includes a cap on itemized deductions, including charitable deductions, for high-income taxpayers to pay for an Alternative Minimum Tax (AMT) fix.
The Administration proposes to limit the tax rate at which high-income taxpayers can take itemized deductions to a maximum of 28 percent, affecting married taxpayers filing a joint return with income over $250,000 (at 2009 levels) and single taxpayers with income over $200,000. Currently, these taxpayers may claim up to a 35 percent deduction. The proposed limitation would be effective for taxable years beginning after December 31, 2011.
This is the third time that the White House has included this proposal in its budget. The proposal originally was created to pay for the healthcare reform bill.
AFP will ask you to contact your Members of Congress in the very near future. Talking points and draft letters will be provided shortly.
As has been the case for the past two years, AFP opposes this proposal because it would discourage charitable giving at a time when nonprofits are facing enormous financial challenges stemming from the economic downturn.
AFP continues to educate the White House and Congress to ensure the preservation of the charitable deduction. AFP and a coalition of other organizations in the charitable sector sent a letter to the White House. In response to a recently-held Senate Finance Committee hearing on tax reform and tax incentives, AFP submitted these comments.
It is worth noting that Americans make it clear they want to keep common federal income tax deductions, according to a recent Gallup poll. In particular, nearly 7 in 10 oppose eliminating the charity deduction.
Also, recent IRS data indicates that charitable giving fell further in 2008 and 2009 than many had anticipated in this report. The IRS previously reported that Americans wrote off $172.9 billion in charitable contributions in 2008, a 10.6-percent drop from 2007. The preliminary IRS estimate for 2009 projects an additional 14-percent drop, to $148.6 billion.
The IRS data further indicates that high income taxpayers (those earning more than $200,000) contributed $49.6 billion to charities in 2009, the equivalent of one-third of all contributions given that year (see page 18). This is important to note because this is the tax bracket that is targeted by the Administration's proposal to cap itemized deductions, including charitable deductions.
New York Reintroduces Ethics Education Legislation
The New York legislature has reintroduced a bill that would create an ethics education program for fundraisers. The program is voluntary, but the legislation implements a certification process and requires the attorney general to issue a report that, among other things, would make recommendations regarding the feasibility of making the course mandatory for fundraisers.
New York members are urged to touch base with their chapters about this issue. You might find this position paper helpful.
The bill is in the Assembly Ways and Means Committee and Senate Finance Committee, and AFP has circulated its position papers to the members of both committees.
When the legislature initially introduced a similar bill a few years ago that made the education program mandatory, AFP met with key Assemblymembers and Senators and urged that the program be made voluntary. AFP cited the burden that would be placed on all organizations, particularly very small ones. In addition, AFP argued that it seemed unfair to require out-of-state organizations to comply with a mandatory ethics education regime.
At the time, the sponsors of the legislation accepted many of AFP's recommendations and made the ethics training voluntary. However, the Governor vetoed the bill.
Oregon and North Carolina Consider Legislation Implementing Administrative Cost Ratios
Bills in Oregon and North Carolina would penalize charities that spend too much money on administrative costs. In Oregon, charities that spent too much money on management and fundraising would lose their tax-deductibility status. In North Carolina, nonprofit corporations that spend too much money on administrative expenses would be ineligible for state grants.
AFP will be providing materials for its Oregon and North Carolina members shortly.
Oregon Attorney General John Kroger wants lawmakers to let him eliminate state tax subsidies for charities that spend more than 70 percent of their funds on management and fundraising, rather than their charitable missions.
Under the bill, approved by the state Senate two weeks ago, donations to those organizations would no longer be tax-deductible, and the charities would have to notify potential donors of that status.
As noted in a recent USA Today article, several states, including Oregon, previously had laws prohibiting charities from soliciting donations if their overhead costs were disproportionate to spending on charitable programs. The laws were repealed after the U.S. Supreme Court ruled in 1980 that government attempts to restrict a charity's ability to solicit donations violated the First Amendment.
In North Carolina, a bill has been introduced that states that no State funds shall be awarded as a grant to a nonprofit corporation unless the nonprofit corporation satisfies all of the following criteria during the fiscal year for which the grant is made:
(1) At least thirty‑five percent (35%) of the funding for the nonprofit corporation is from private sources.
(2) The administrative expenses of the nonprofit corporation do not exceed fifteen percent (15%) of the total budget or receipts for the nonprofit corporation.
If a nonprofit corporation that receives a State grant violates the criteria above, then the Office of State Budget and Management may suspend further disbursement of funds to the nonprofit corporation and try to recover grant funds already disbursed to that nonprofit corporation.
Potentially arbitrary administrative cost thresholds overlook more important aspects of nonprofits, including their mission, and ignore the fact that some highly-effective nonprofits, particularly very small nonprofits, may have high administrative costs. Furthermore, some nonprofits that support necessary, yet unpopular missions may have higher administrative costs due to the additional challenges that they may face.
Administrative costs alone are poor indicators of nonprofit effectiveness, and AFP has raised this issue both with the IRS and the Canadian Revenue Service (CRA)-in the latter case, the CRA revised an evaluation grid based upon cost ratios in its fundraising guidelines in response to AFP input.
Bill C-470 and NPD Legislation Fail in Wake of Canada's Election
As you are aware, Governor General David Johnston officially dissolved Parliament last Saturday, March 26, 2011, and an election has been called for May 2, 2011.
The dissolution of Parliament terminated bills that had not received Royal Assent, meaning that these bills are not reinstated when Parliament reconvenes. Instead, the bills must be reintroduced as completely new bills. As a result both Bill C-470 and the National Philanthropy Day® bills died.
Now is an ideal time to meet with your local Members of Parliament, local candidates running for office and, where applicable, local Senators.
If the work around Bill C-470 taught the charitable sector anything, it is that there are a lot of commonly-held misconceptions about the sector. Your efforts, therefore, are key to educating our elected officials and addressing these misconceptions while raising the visibility of AFP and the fundraising profession as a whole.
When meeting with Members of Parliament, candidates, Senators and/or their staffs, you might find the following talking points helpful.
- Thank you for taking the time to meet with me. I am here as a constituent and an employee of [name of your organization and its mission], as well as a member of the Association of Fundraising Professionals, also known as AFP.
- AFP is the largest community of fundraising professionals in the world. It represents 30,000 members in 222 chapters throughout the world, including 3,100 members in 16 chapters across Canada. Our mission is to advance ethical and responsible fundraising and philanthropy through research, education and certification programs.
- Our members raise funds for a wide variety of charities, from large, multinational institutions to local grassroots organizations on every conceivable issue - education, healthcare, religion, and the environment, to name just a few.
- AFP members are committed to ethical fundraising and educating the public about wise giving. AFP's Code of Ethical Principles and Standards has been used as a model for charities and nonprofits around the world, and members are required to sign the code annually.
Collaborative Efforts: Government and Sector
- Building on a record of recent success, our key message is that AFP members are keenly interested to provide our expertise and experience to Parliament on any issue relating to the charitable sector.
- AFP has successfully worked in the past in collaboration with the government. For instance, we have forged a strong working relationship with the CRA, and we have seen this approach result in strong public policy that protects donors while respecting the rights of charities to raise funds for critically needed programs. We welcome a similar collaborative relationship with you and your staff.
- We would welcome the opportunity to update you in the future on issues of importance to our sector.
Public Trust and Regulation
- I came to chat with you today to briefly discuss some issues important to the charitable sector and to perhaps clear up some misconceptions about the sector.
- Over the past few years, administrative costs (including fundraising expenses) and nonprofit compensation (recently considered in Bill C-470) have been suggested as effective baseline indicators of nonprofit performance and transparency.
- AFP contends that attempts to create simplistic indicators such as these are far too misleading and overlook other equally important elements of nonprofits such as the use of commission-based compensation (which is prohibited in the AFP Code of Ethical Principles and Standards), the size of the charity, charitable causes with limited appeal and the organizations' internal fundraising evaluation processes.
- Also, when legislative and regulatory changes are suggested, it is important to avoid creating redundancy. For instance, Bill C-470 created a potential redundancy on top of existing Canada Revenue Agency (CRA) oversight.
- Unfortunately, the charitable sector has been placed under greater scrutiny due in a large part to some well-publicized accounts of wrongdoing by a select number of nonprofits. We think that these wrongful acts are quite rare and the exception to the rule, but we nevertheless support transparency and ethical behavior, exemplified by the AFP Code of Ethical Principles and Standards that each of our members must sign and abide.
- When legislative or regulatory changes affecting the nonprofit sector are proposed, we urge you to consider taking a broad view. The charitable sector is complex, and one-size-fits-all approaches often fail to acknowledge that complexity.
- For these reasons, we again offer our expertise and experience to Parliament on legislative and regulatory matters relating to the sector and would welcome a collaborative relationship with you and your staff.
- Again, thank you for your time.
If you are able to meet with your MP, a local candidate and/or Senator, please let us know, so we can keep a record of who has been contacted. We also might be able to foster a stronger collaborative framework with them. If you are unable to set up a meeting, please consider sending a letter with the points mentioned above.
Feedback needed from AFP members to improve CRA Fundraising Guidance
As we mention in the talking points, AFP has built a strong working relationship with the CRA. Through Andrea McManus, CFRE, our chair, AFP has been invited to provide the CRA with feedback on and potential improvements to the fundraising guidelines. We would welcome any comments from you regarding areas where the guidance could be improved. Alternatively, you can also let us know which parts of the guidance are working well.
Among the bills that died was Bill C-470, introduced by Albina Guarnieri, Liberal MP for Mississauga East-Cooksville. Late last year, the bill's sponsor agreed to eliminate a very concerning salary cap from the bill. Unfortunately, that provision was offset by an amendment that broadened the bill's disclosure provisions to include all employees over the floor of $100,000, rather than disclose the top five as originally proposed by the bill's author. AFP was concerned about the unintended consequences of this amendment and was developing an education effort to educate MP's and Senators about the amendment. Now that the bill is dead, it is not clear whether this bill will be reintroduced when Parliament reconvenes by another MP, but it is worth noting that Guarnieri is retiring and will not return to Parliament.
Bill C-470 raised concerns, but it also gave AFP the unique opportunity to work in a collaborative, proactive way with a broad spectrum of other organizations including Imagine Canada, HCCC, the Canadian Bar Association and others. It will be important to keep a strong working relationship with others in the sector because the issue of executive compensation, as well as other issues affecting the sector, will continue to be a point of discussion.
National Philanthropy Day® Legislation
Unfortunately, another casualty of the dissolution of Parliament was the National Philanthropy Day (NPD) bill. On March 4, 2010, Senator Terry M. Mercer, CFRE (Liberal, Nova Scotia-Northend Halifax) introduced Bill S-203 that would permanently recognize National Philanthropy Day every November 15th. The bill was awaiting 3rd reading in the House of Commons.
We are aware that Senator Mercer is ready to reintroduce the NPD bill shortly after Parliament reconvenes and thank him for his continued efforts.