Our federal tax system was created in 1913. Allowances for charitable contributions quickly followed in 1917. At the time, one Congressman said, “If a man wants to make a gift to charity, he ought to be encouraged to do so and not discouraged.”
As Vermonters grapple with the current budget deficit and try to devise comprehensive tax reform, charitable giving incentives for nonprofits are being re-examined. Last week, the House Ways and Means Committee revisited an idea that originally stalled in 2013 to limit tax deductions, including mortgage and medical expenses, and charitable donations to the work of nonprofits.
The proposal caps federal deductions at $15,500 for individuals, $31,000 for joint filers. Limiting the amount of federal deductions in effect increases the adjusted gross personal income that the state, in turn, can tax. Some see this as a painless way to increase taxable income without significantly raising taxes.
However, in a nation-wide study of high net worth philanthropy, 67% of people interviewed confirmed that a decrease in income tax deductions would cause them to contribute less. We need this giving to be encouraged, not diminished, to keep nonprofits robust, sustainable, and most importantly, addressing needs in our communities.
Several state legislatures have already considered similar capping schemes. Oregon, Minnesota, Kansas, North Carolina, and Montana decided that support to charitable nonprofits is too important to their communities, and they excluded charitable deductions from their fiscal solutions. Maine, Hawaii, and Missouri initially capped contributions, or removed giving incentives, but restored them when the damage became evident.
Organizations earn their nonprofit status every day by delivering critical services that improve lives and transform communities. State funding is but a small part in the precarious financial reality of a nonprofit that is far more dependent upon the tax-incentivized generosity of foundations, corporations, and especially individuals.
More than 4,100 human, social service, educational, religious, and cultural nonprofits in Vermont employ nearly 44,000 people, representing almost 15% of the state’s total workforce. It’s a resilient sector, despite flat or diminishing support from the state over the last decade.
Nonprofit organizations are essential partners in these challenging economic times. Indeed, a civil society depends upon healthy nonprofits. Any short-term gains in tax revenue will come at the expense of the already insufficient social safety net that nonprofits provide - and in the long run, will cost Vermonters a great deal more.