Many Vermont Nonprofit Groups Alarmed About Impact Of Proposed State Tax Plan

May 31, 2018

A coalition of 40 nonprofit groups says a proposed cap on tax credits for charitable contributions will have a devastating impact on their ability to offer services to Vermonters.

The group is urging lawmakers to remove the cap from the proposed tax bill, but key legislators say it's unlikely any changes will be made.

Many of the nonprofit groups are concerned about their financial future because of recent federal tax changes and proposed changes in Vermont's tax law.

Dan Smith, the president of the Vermont Community Foundation, is worried that the changes will discourage many Vermonters from making contributions of all sizes.

"I think there is some risk and some exposure that between the federal changes and this state change, we end up seeing a decline in charitable activity over the course of the coming years,” said Smith. “That'll have long-term consequences for our communities."

"I think there is some risk and some exposure that between the federal changes and this state change, we end up seeing a decline in charitable activity over the course of the coming years." — Dan Smith, Vermont Community Foundation president

Smith and the other nonprofit leaders are concerned that the new federal tax law substantially increases the size of the individual exemption for people who don't itemize their tax deductions. This change is expected to significantly reduce the number of moderate income people who itemize their tax returns.

People who itemize can deduct charitable contributions — but with far fewer tax filers itemizing, it's believed there will be less incentive to make those contributions.

On top of that, the Legislature's proposed tax bill caps the amount of charitable contributions made by Vermonters that qualify as a tax credit. Contributions up to $20,000 would be eligible for a 5-percent credit but there would be no tax advantage for making a larger donation.

Shane Jacobson, the president of the University of Vermont Foundation, thinks the proposed state cap devalues the importance of large contributions.

"The message that they're sending to donors who are both lucky enough to make gifts like that, but also motivated to give gifts above that level ... is that those gifts aren't valued in the same way," said Jacobson. "And I think that's really problematic."

Sen. Ann Cummings, chair of the Senate Committee on Finance, said she understands "the angst" that this issue is causing Vermont's nonprofit community. But she argues that there's an important policy decision involved in this debate.

Cummings said the money that the state is saving by capping tax credits for charitable contributions has been used to provide tax benefits for middle-income Vermonters.

These include an expansion of the earned income tax credit and making some Social Security benefits exempt from the state income tax.

"We are cognizant of the income gap in this country — the widening income gap — and I think there is a determination to do whatever we can to help the average Vermont taxpayer." — Sen. Ann Cummings, Senate Committee on Finance chair

"We are cognizant of the income gap in this country — the widening income gap — and I think there is a determination to do whatever we can to help the average Vermont taxpayer,” said Cummings.

Cummings said it's also important to realize that the new federal tax law provides greater benefits for very large donations.

“So there is a motivation to perhaps give more at the federal level,” said Cummings.

Cummings also said the state plan also allows all taxpayers to be eligible for the tax credit — if they itemize or not.

Vermont Tax Commissioner Kaj Samsom said Gov. Phil Scott originally backed having no cap for contributions at the state level, but agreed to the $20,000 limit as part of a legislative compromise.

Samsom said studies show that contributions from large donors make up the vast majority of money donated in Vermont, but he said it's very difficult to tell how the changes will affect these individual contributions.

"When we looked at ... the history of giving that we can tell from income tax returns in the past, we saw that the majority of giving would no longer be tax deductible," explained Samsom. "So it is a concern, it's a valid concern, but again it's very hard to predict behavior and impact."

Because the House and Senate have reached an agreement on this issue, Cummings said it's unlikely that any changes will be made.

But, Cummings said she'd be willing to revisit this issue during the 2019 session if there's evidence that the new state cap is having an adverse impact on charitable giving in Vermont.

Disclosure: VPR is a member of the nonprofit coalition seeking changes to the state tax bill.  Also, the Vermont Community Foundation is a VPR underwriter.