With Congress in recess until right after Labor Day, and November’s mid-term elections soon approaching after that, now is a good time to take stock and review Congressional action on charitable giving issues thus far in 2014 and attempt to forecast what is likely to happen in Washington during the remaining months of the year before the official close of the 113th Congressional session.
Review of Relevant Congressional Action
Amidst a hyper-partisan environment in Washington that has stymied progress on several major pieces of legislation, lawmakers have actually spent a significant amount of time this year debating – both formally and informally – various tax and budget issues that affect not only charitable giving but tax-exempt organizations as a whole. By and large, this debate has centered around two main legislative vehicles: (1) tax “extenders” legislation, a large package of tax provisions that, most recently, expired at the end of 2013 and includes the IRA Charitable Rollover, and (2) legislation to comprehensively overhaul the United States tax code for the first time in nearly 30 years which could, among many other things, alter or eliminate the charitable deduction.
For better or worse, leadership in the Senate and House have taken starkly different approaches in their attempts to advance these two legislative vehicles this year. On extenders, for example, the Senate has agreed to a straight-forward retroactive two-year extension of virtually all of the lapsed provisions while the House has considered the provisions one-by-one and is pushing to make many of them permanent. On tax reform, the tax-writing committee in the Senate is just beginning to hold hearings while in the House, lawmakers continue to consider a 1,000 page draft bill that would make major changes to the charitable deduction.
Despite these differing approaches, or perhaps because of them, there have been a number of significant developments on both legislative vehicles (often which overlap) during the course of the last seven months. These developments include:
One-Third of Senate Supports Current-Law Charitable Deduction (January): One-third of the United States Senate – 33 Senators, 16 Democrats and 17 Republicans – signed a letter in January publicly calling for the protection of the “full value and scope” of the charitable deduction in any comprehensive tax reform legislation that is ultimately considered by Congress. The release of this letter marked a significant accomplishment for the charitable sector and demonstrated remarkable support for the charitable deduction. Notably, the chief sponsor of the letter was Senator Ron Wyden, who soon after releasing the letter became the new Chairman of the Finance Committee, the tax-writing committee in the Senate with jurisdiction over tax reform legislation.
Wyden Becomes Senate Finance Chair (February): As noted above, Senator Wyden assumed the chairmanship of Senate Finance, replacing Senator Max Baucus who left the Senate to become Ambassador to China. Upon taking the gavel, Chairman Wyden indicated that passing an tax extenders package (including an extension of the IRA Charitable Rollover) was a top priority for him and that he viewed work on extenders “as a bridge for broader [comprehensive tax] reform” with such reform taking place some point in late 2015. This view of tax legislation (i.e., first move on extenders, then consider tax reform) put him at odds with his counterpart in the House, Ways & Means Committee Chairman Dave Camp, who steadfastly maintained, at least until the Spring, that tax extenders should be dealt with in the context of, and at the same time as, comprehensive tax reform.
Camp Releases Draft Reform Bill (February): By far the most significant legislative development this year was the February release of Chairman Camp’s comprehensive tax reform bill, dubbed the “Tax Reform Act of 2014.” Camp’s legislation would dramatically alter the United States tax code and includes many specific provisions relating to charitable giving and tax-exempt organizations. The draft bill was released on the heels of 30 committee hearings dedicated to tax reform, 11 bipartisan tax reform working groups, three discussion drafts on specific areas of tax law, and more than 14,000 public comments on the matter, and set off a tidal-wave of debate in and around Washington that continues today.
Under the Camp bill, the current seven tax brackets would be collapsed into three brackets of 10%, 25% and 35%, but the vast majority of households – those making less than $450,000 a year – would pay no more than the 25% rate. To achieve these lower rates, the bill would eliminate the personal exemption for dependents and many deductions like state and local taxes and mortgage interest would be either eliminated altogether or limited in some way. The bill would also turn most taxpayers (95%) into non-itemizers by raising the standard deduction from $12,200 to $22,000 for married couples filing jointly. There is little doubt the changes outlined above would have a dramatic effect on charitable giving in America, but the bill goes much further by making a number of specific changes to not only the current-law charitable deduction but also the laws governing various tax-exempt entities.
Among the many provisions specifically affecting charitable giving is the elimination of the charitable deduction (through the creation of a “floor”) for all charitable gifts that fall below two percent of a taxpayer’s Adjusted Gross Income, which, when combined with other changes called for in the legislation, would effectively eliminate the charitable deduction for the majority of taxpayers; streamlining Adjusted Gross Income limits for cash gifts and capital assets, effectively discouraging gifts of cash and encouraging gifts of capital assets instead; and limiting a taxpayer’s charitable deduction to the donor’s basis in the asset rather than fair market value, which could dramatically affect major gift programs.
Although Camp’s legislation will not actually be voted on this year or in its current form, it has framed the tax reform debate for the rest of 2014 and likely into 2015 as well. It is also possible that some of the provisions in his bill could be picked apart and used as “revenue raisers” to offset the cost of other tax bills that do have a chance of moving toward enactment in the short-term.
President Recommends Limiting Charitable Deduction (March): President Obama’s Fiscal Year 2015 budget once again sought to limit the value of the charitable deduction, a position also supported by many Democrats in Congress. Specifically, his budget would cap all itemized deductions, including the charitable deduction, at 28 percent. For the second year in a row, the President’s budget also called for the so-called “Buffett Rule,” which would impose a minimum tax rate of 30 percent on individuals and families earning more than $1 million a year. The charitable deduction would be exempt from the President’s Buffett Rule, however.
Camp Announces Retirement (March): About a month after the release of his draft tax reform bill, Chairman Camp announced that he will retire from Congress at the end of the year. Camp has chaired the Ways & Means Committee for six years and would have been required to step down as Chairman at the end of this Congress due to term limits. Camp’s retirement clears that way for House Budget Committee Chairman Paul Ryan to assume the Ways and Means gavel in the next Congress.
Senate Finance Approves Full Extenders Package (April): The Senate Finance Committee approved S. 2260, the Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act, legislation which would retroactively extend the roughly $85 billion worth of tax provisions that lapsed at the end of 2013 for a two-year period (i.e., January 1, 2014 through December 31, 2015). This legislation includes the IRA Charitable Rollover provision. Although this legislation reflects the desire of Chairman Wyden and others in Senate leadership to address extenders in a single package (and not one-by-one, as is the case in the House) and the package easily passed through committee on a bipartisan vote, progress on the bill on the Senate floor was halted because of a partisan dispute over unrelated amendments.
Senate Hearings on Reform (June – July): Chairman Wyden pledged to hold a number of hearings over the summer months on various tax reform issues, attempting to keep reform front-and-center and creating a legislative record for whatever reform ultimately does take place. Recent hearings have focused on student debt, international issues and corporate inversions, identity theft and taxpayer protections, and Social Security.
House Approves Charitable Giving Legislation (July): The full House approved H.R. 4719, the America Gives More Act, a package of five tax provisions (i.e., three tax extenders and two new provisions) aimed at increasing charitable giving. This legislation reflects the House’s work on charitable giving-related extenders, and the chamber has separately approved several other bills addressing business and individual-related extenders as well. H.R. 4719 includes a retroactive and permanent extension of the current-law IRA Charitable Rollover. In addition, the legislation would give taxpayers until April 15 to make charitable contributions eligible for the charitable deduction, instead of requiring those gifts to be made by the end of the calendar year, and would modify the excise tax rate on the investment income of private foundations. Two other provisions in the legislation provide for enhanced deductions for conservation easements and enhanced deductions for food inventory.
Outlook for Remainder of Year
As noted above, both the House and Senate are presently in a five-week recess. Lawmakers will return to Washington after Labor Day, reconvening on September 8th, for just a few weeks of legislative work before recessing again for virtually all of October, so that Members of Congress can devote their time to campaigning for the mid-term elections on November 4th. The entire House of Representatives and one-third of the Senate is up for re-election, and although the House is widely expected to stay in Republican control, according to recent polls the balance of power in the Senate remains up for grabs. Then, a couple weeks after the November elections, Congress is almost certain to reconvene for a “lame duck” session that could run well into December.
When lawmakers return in September, look for Congress to become more partisan as Republicans in the House in particular seek to advance “message bills” that they perceive will energize their base and help their caucus members in the mid-terms. For example, according to Chairman Camp, it is possible the House votes in September to repeal the estate tax. Such a measure would certainly pass the Republican-controlled chamber, but given the fact that President Obama and Senate Democrats favor expanding the estate tax, the proposal stands no chance of becoming law. In addition, President Obama and the Republicans reached agreement on estate tax modification as part of the American Taxpayer Relief Act of 2012, and there is virtually no interest among the major players to revisit this issue in the near future.
When Congress returns after the November elections, however, lawmakers will have to deal with a number of major pieces of legislation they have been unable to advance thus far in the year and that list will certainly include tax extenders, including the IRA Charitable Rollover. As noted above, the full House has already passed several bills to make various business-related and charitable extenders a permanent part of the tax code, and House Republicans have indicated in recent weeks that when push comes to shove they are committed to making at least some of the extenders, particularly the Research & Development tax credit, permanent whenever the House and Senate ultimately get to conference on extenders. The Senate, of course, remains stalled on their broad-based two-year extension bill (S. 2260) that passed through committee in April. Complicating matters further is an open question of whether the massive cost of extenders will be offset with revenue raising provisions. Despite the differing approaches to tax extenders, both Democrat and Republican leaders in the Senate and House have repeatedly said they are committed to resolving extenders this year, although to date they have been unable to forge a path forward. At this point in the process, most observers believe a shorter-term extension along the lines of what is pending in the Senate will win out the day. Until Congress acts, however, the IRA Charitable Rollover remains off the books.
As for tax reform, aside for some continuing hearings in the Senate and House, we will see limited movement on the issue in September and almost no real progress during the lame duck session. With that said, Chairman Wyden, who depending on the outcome of the mid-term elections will either remain as chairman of Senate Finance or perhaps become its ranking member in the next Congress, has indicated that he is pressing forward on tax reform, much like his House counter-part. In June he said there is “a prime 15-month window from now until the August recess of 2015” for comprehensive tax reform, after which Congress will become consumed with the 2016 presidential elections. It is therefore evident that both chambers will continue to move forward on the building blocks of reform with an eye toward moving legislation at some point later next year.