Delaware Nonprofits and Supporters Should Remain Concerned and Voice Their Opinions to their State Legislators
Summary. The Delaware General Assembly continues to review legislation that, if passed, will significantly impact all Delaware nonprofits and houses of worship. Section 4 to House Bill 240, related to taxes on personal income ("Section 4 to HB 240"), eliminates itemized deductions, which will effectively exclude charitable deductions from being taken on individual state tax returns. Innovincent and others have previously summarized the main problems regarding Section 4 to HB 240 in its current form.[1] Following debate on Wednesday, June 21, the Delaware House Revenue & Finance Committee approved HB 240 by a 7-4 vote. It now moves to the House for full discussion.
While other parts of HB 240 and other related bills are beyond the scope of this alert, Innovincent believes that a carefully crafted amendment to HB 240 could effectively strike a balance between the budgetary issues otherwise encompassed by HB 240 and the charitable deduction issue in Section 4 to HB 240 that may unintentionally cripple the Delaware nonprofit sector. We offer for consideration a proposed amendment, as discussed below, to cap rather than eliminate itemized deductions, while excluding charitable contributions from that cap. The cap amendment may be a compromise way to generate revenue without risking the benefits of charitable contributions in the process.
Call to action. All nonprofits should continue to review Section 4 to HB 240 and determine how it will impact their operations and budget. Additionally, nonprofits should gather, summarize, and share the extent that they rely on individual contributions and how a 20% or higher decrease would impact them. Nonprofits and other interested members of the public should also continue to contact their legislators and voice their concern.
Summary of Proposed Amendment to Section 4 to HB 240. When it comes to the budget, difficult compromises are often made without complete deliberation and on expedited and compressed schedules. Here, HB 240 as currently drafted, appears to net approximately $100 million toward the closing the budgetary gap, with some unknown percentage (likely small) coming from the charitable deduction component implicit in the legislation. For the reasons previously discussed, the unintended consequences of totally eliminating itemized deductions in Delaware could wreak havoc on the State's nonprofit and charitable organizations and the philanthropic community on which they depend.[2] We doubt anyone in government would want to add $1 to the state revenue stream at a loss of $5 or more in donations to a nonprofit. Carving out a portion of the law to ensure that Delaware charitable organizations are not damaged in the process is necessary.
An amendment to reinstate itemized deductions, but place a cap on them, may be a compromise that could save the charitable deduction at the state level without sacrificing too much of the other potential budgetary gains. In reviewing other state's similar tax legislation and debate, the Vermont legislature struck a similar compromise, which is instructive for consideration. The proposal made herein is intended to offer a path forward and advance the debate. If taken, additional research into the extent of the overall budgetary impact will need to be done.
Proposed Amendment to Section 4 to HB 240. Innovincent proposes that nonprofits and other interested parties consider whether the following amendment could solve the issue. This proposal effectively tracks the comparable Vermont legislation enacted following their state legislature's debate on the same issue currently before the General Assembly:
This amendment provides a cap on total itemized deductions, limiting the total deduction allowed to be the higher of (a) the standard deduction or (b) 2.5 times the standard deduction plus any additional deductions for State and local income taxes, medical and dental expenses, or charitable contributions, as taken on the federal income tax return.
The budgetary impact of this proposal has not been researched.
Why Keeping the Charitable Deduction Matters. The nonprofit sector is important in Delaware. To put it in perspective, the state population is approximately 952,065[3] with a civilian labor force of approximately 476,800.[4] Of that work force, 11.6% of employment in Delaware is attributed to nonprofits,[5] or 55,309 people. There is no dispute that this small workforce (and their volunteers) impacts most of the rest of the State.
As previously discussed, $476.1 million of charitable giving was deducted in Delaware in 2012 (the most recent year for which federal income tax data is available).[6] Of the 119,840 taxpayers who itemized, 83% claimed this exemption,[7] or 27% of total returns.[8] As shown in Table 1, the average amount deducted by an individual taxpayer was $2,957.
Table 1. Delaware Giving Profile (2012).[9]
Nonprofits and their employees rely entirely on a combination of generosity from individuals, foundations, corporations, and federal and state funding sources. Giving by individuals represents the largest component of this calculus at nearly 72% nationally.[10] Tax incentives, both at the federal and state level have an impact. In the most recent annual Bank of America study of high net worth philanthropy, 33.4% of high net worth individuals said that their household charitable giving would decrease or dramatically decrease if they received no income tax deductions for charitable giving.[11] Legislation such as that proposed in Section 4 to HB 240 could operate to reduce the amount of individual giving from anywhere between 10 percent to 20 percent—roughly $30 million to $60 million collectively locally—assuming Delaware sees similar results to those other states who have experimented with this same type of tax legislation.[12]
There is no easy way to predict the exact impact getting rid of the Delaware's state charitable deduction will have. "Federal tax rates are higher than state tax rates" and "itemized deductions are always worth more in the federal code than state code."[13] Indeed, there are a handful of states that do not offer (or perhaps never have offered) tax deductions for charitable contributions.[14] But, where other states have had existing charitable deductions in place like Delaware, and have made tax code changes similar to those proposed in Section 4 to HB 240, the impact has been swift and significant, as soon as the immediate following year.[15] As Section 4 to HB 240 and other related bills continue to be debated, it is important to give strong consideration to the probable side effects that something like the elimination of the state charitable deduction will have on Delaware nonprofits and other charitable organizations as well as on the constituents served by these organizations, their employees, and volunteers.
Next Steps. Innovincent and many others working in or with the nonprofit sector, including the Delaware Alliance for Nonprofit Advancement (DANA), continue to believe that Section 4 to HB 240 will have a significant and detrimental impact on every nonprofit and house of worship in the state. The proposed amendment to Section 4 to HB 240 as discussed above may not be the ultimate way to resolve this issue, but we hope those decision makers give it due consideration as a first step as the session end draws closer.
Conclusion. For the reasons discussed above and in our previous alert, the potential impact of Section 4 to HB 240 as drafted on Delaware nonprofits and other charitable organizations is severe, and the relevant language addressing the charitable donation deduction should be reevaluated or eliminated. We offer a proposed amendment as one way to potentially reach a compromise solution as part of the ongoing debate.
Should you have any questions or concerns about Section 4 to HB 240, you should contact your state legislator. If you do not know your state legislator, you can find that online at http://legis.delaware.gov/FindMyLegislator.
Download a copy of the PDF of this alert here.
Disclaimer
This alert should not be construed as legal or tax advice or legal or tax opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer or tax advisor on any specific legal or tax questions you may have concerning your situation.
IRS Circular 230 Notice
Any U.S. federal tax advice contained herein is not intended or written to be used, and cannot be used, for the purpose of avoiding any penalties that may be imposed under the Internal Revenue Code or for the purpose of promoting, marketing, or recommending any transaction or matter addressed herein.
[1] See Innovincent Client Alert, Delaware HB 240: Draft Legislation Regarding Charitable Deduction to Impact Delaware Nonprofits and Other Charitable Organizations (June 20, 2017), available at www.innovincent.com/blog/2017/6/20/client-alert-delaware-hb-240-draft-legislation-regarding-charitable-deduction-to-impact-delaware-nonprofits (last visited June 22, 2017). See also Delaware Alliance for Nonprofit Advancement Public Policy Blog, Update on Delaware State Budget (June 20, 2017), available at www.delawarenonprofit.org/blogpost/953787/DANA-s-Public-Policy-Blog (last visited June 22, 2017).
[2] See Innovincent Client Alert, Delaware HB 240: Draft Legislation Regarding Charitable Deduction to Impact Delaware Nonprofits and Other Charitable Organizations, supra.
[3] See U.S. Census data table (as of July 1, 2016), available at www.census.gov/quickfacts/fact/table/DE/PST045216 (last visited June 22, 2017).
[4] See Bureau of Labor Statistics Data (preliminary May 2017 estimate), available at www.bls.gov/eag/eag.DE.htm#eag_de.f.1 (last visited June 22, 2017).
[5] See Bureau of Labor Statistics, Nonprofits in America: New Research Data on Employment, Wages, and Establishments Figure 2 (Feb. 2016), available at www.bls.gov/opub/mlr/2016/article/nonprofits-in-america.htm (last visited June 22, 2017).
[6] See Innovincent Client Alert, Delaware HB 240: Draft Legislation Regarding Charitable Deduction to Impact Delaware Nonprofits and Other Charitable Organizations, supra at 2.
[8] Id. (dividing 439,680 returns by 119,840 who had itemized charitable deductions).
[9] Data compiled from Justin Myers et al., How America Gives (Chronicle of Philanthropy), available at www.philanthropy.com/interactives/how-america-gives#state/10 (data last updated January 5, 2015; website last visited June 22, 2017). This is the most recent compilation of data that we could find.
[10] See Giving USA 2017: The Annual Report on Philanthropy for the Year 2016 (summary infographic), available at givingusa.org/see-the-numbers-giving-usa-2017-infographic (last visited June 22, 2017).
[11] 2016 Bank of America Study of High Net Worth Philanthropy 80 (2016), available at www.ustrust.com/publish/content/application/pdf/GWMOL/USTp_ARMCGDN7_oct_2017.pdf (last visited June 22, 2017). High net individuals are defined as those with an annual income of $200,000 or more or a net worth of $1 million or more excluding property values Id. at 8.
[12] See Innovincent Client Alert, Delaware HB 240: Draft Legislation Regarding Charitable Deduction to Impact Delaware Nonprofits and Other Charitable Organizations, supra.
[13] See Brief Summary of Itemized Deductions at 3, available at www.leg.state.vt.us/jfo/brtc/wp-content/uploads/2011/01/Charitable-deductions.pdf (last visited June 22, 2017).
[14] See Common Good Vermont, Impact of Charitable Deduction Caps in Hawai'i and Michigan (Apr. 4, 2015) (summarizing charitable deduction requirements by state), available at blog.commongoodvt.org/2015/04/impact-charitable-deduction-caps-hawaii-michigan (last visited June 22, 2017).
[15] See Innovincent Client Alert, Delaware HB 240: Draft Legislation Regarding Charitable Deduction to Impact Delaware Nonprofits and Other Charitable Organizations, supra at 3-4 (citing examples).