Congress hurriedly passed the new 429-page tax reform bill, with illegible, handwritten changes in the margins, for President Trump to sign on Christmas Eve. Both parties agreed during the election that overhauling the tax code was a top priority, but this was in no way a bi-partisan approach.
By way of contrast, the last rework of the tax code resulted in the Tax Reform Act of 1986, signed by a triumphant President Reagan. That act took nearly three years to develop — three years of battles, and tough partisan negotiation, kept on track by President Reagan (R) and then Speaker of the House, Tip O’Neill (D).
From conception, that bill was more apt to succeed. Reagan insisted on only two things: simplification and a revenue neutral bill, leaving plenty of room for negotiation. When the Act was finally signed Oct. 22, 1986, a beaming President Reagan was flanked by its proud sponsors, Democrats Richard Gephardt in the House and Bill Bradley in the Senate. The bill included a tax credit as an incentive for charitable giving to help nonprofits operate. Though not perfect, that bi-partisan bill fulfilled its role for more than 30 years.
The 2017 Tax Cuts and Jobs Act, passed without a single Democratic vote, brought down the corporate tax rate from 35 percent to 21 percent among other pro-business measures and lowered the top individual tax rate from 39.6 percent to 37 percent. As a result, “The Wall Street Journal” estimates the deficit will increase by $1.4 trillion. Some lower income payers will realize an impermanent tax decrease.
So why should we, as arts supporters, be concerned with the tax reform of 2017? Because, under the guise of simplified filing, the bill doubles the standard deduction — to $12,000 from $6,350 for individuals and to $24,000 from $12,700 for married couples. According to the Tax Policy Center, this is estimated to increase the number of those who take the standard deduction, rather than itemize, from 5 percent to one third of filers, because itemizing only makes sense if your deductions exceed the standard deduction. As explained by UMKC Law Foundation Scholar and Professor of Law, David Auchtenberg, that (standard deduction) group will now be asked to contribute “after tax dollars,” which is a much bigger challenge.
Taxpayers who don’t itemize have less incentive to give. They won’t need that donation receipt from Goodwill because they will realize more savings by taking the new and bigger standard deduction.
The simplification will come with a price to nonprofit organizations estimated by experts including Indiana University’s Lilly Family School of Philanthropy, at $13 billion to $20 billion in donations lost to charities.
There was a concerted effort to head off this measure led by the Council on Foundations, National Council of Nonprofits, and Independent Sector, representing thousands of charitable and philanthropic organizations. Although President Trump said earlier he wouldn’t change the standard deduction, the “art of the deal” prevailed. He did just that.
The bill also raises the inheritance tax threshold from $5 million to $10 million per person, the effects of which remain to be seen in terms of arts planned giving programs. Last year overall charitable bequests totaled $30.36 billion, and the Tax Policy Center estimates a drop next year of $4 billion.
A sharp eye should be kept on the sparse and delicate balance of arts funding under the Trump administration. His promise to discontinue funding the National Endowments for the Arts and Humanities had to be overruled by Congress, but it is an annual threat. Ironically, I have been told that the arts would be fine without public funding because private donor support is so solid.
Under current law, most arts organizations enjoy 501(c)(3) nonprofit, tax-exempt status with the Internal Revenue Service, designed as a benefit to cash-strapped groups which contribute to the social fabric and wellbeing of the country. The quid pro quo for not being required to pay federal taxes is that tax-exempt organizations cannot engage in significant lobbying on their own behalf or participate in political campaigns. Yet, at the 2017 National Prayer Breakfast on Feb. 2, Donald Trump reaffirmed his campaign promise to repeal the 1954 Johnson Amendment, which bans nonprofits, including religious organizations, from participating in political campaigns. Should he follow through, the implications of charities raising money to influence political campaigns could drastically erode trust in our nonprofit sector.
We really won’t see the major effect of the tax law until early 2019, when tax filers who itemized their charitable donations in 2017 decide to take the much-increased standard deduction instead of itemizing. It is then that our nonprofit arts groups will feel the hurt. Now is the time for arts administrators and boards to prepare.
I could be wrong. The top 5 percent of earners may decide to become much more charitable as a result of their lower tax rate. The corporations whose tax rate will be lower may begin funding charities at a much higher level. And the jobs they may add may go to naturally charitable people. Individuals inheriting estates between $5 million and $10 million may somehow be inclined to direct their tax savings toward philanthropy. And finally, people who want to give to the arts may go right on giving even without the tax incentive.
The only comfort I find is in realizing that single-party legislation has a tradition of failure. We can only hope.
Above: Illustration by Jason Needham