Yesterday, Chairman Kevin Brady released the Tax Cuts and Jobs Act, the House tax bill proposal. The plan seeks to simplify the tax code and reduce corporate tax rates. What isn’t as simplified are the ways in which this plan would pay for an estimated dramatic increase to the deficit, and how this proposal would help lower-income working families.
Here are a few key changes that the bill makes:
- Doubles the standard deduction ($12,000 for single filers and $24,000 for joint filers)
- Lowers the number of tax brackets from seven to just four
- The lowest tax bracket was raised from 10 percent to 12 percent
- The highest tax bracket for high earners remained the same: 39.6 percent
- Caps the local and state deductions for property tax at $10,000
- Repeals deduction on income and sales taxes
- Mortgage interest deduction’s cap is lowered by $500,000
- Lowers the corporate tax rate to 20 percent
- One-time tax on overseas profits set at 12 percent for cash holdings and 5 percent for illiquid holdings
The tax bill impacts the strength of social services sector and the communities we serve in several ways. Although the charitable tax deduction was preserved, there are unintended consequences stemming from other tax code changes that harm our sector. As we have noted in the past, by doubling the standard deduction, fewer people will itemize, leaving just five percent of people with the ability to take advantage of the charitable tax deduction. According to Indiana University research, this would reduce charitable giving by $13.1 billion per year.
Additionally, changes to the Unrelated Business Income Tax (UBIT) could cause further financial stress on nonprofits. The UBIT is a tax nonprofits pay for any business income that is not directly related to the tax-exempt purpose of the organization, such as a nonprofit selling consulting services. The House tax plan calls for “clarification of UBIT.” Previous tax plans and most recently, Rep. Peter Roskam (R- Ill.), has suggested that the UBIT could be a target for paying for increases tax reform would have on the deficit. Former Ways and Means Chairman Dave Camp’s tax reform plan, which is being used as a guide for the current House tax bill, would have expanded the scope of activities under which UBIT would be applicable for charities and nonprofits as well as changing the way the tax is calculated and the penalties for certain situations.
Another area of concern for the nonprofit sector is a proposed provision that would weaken the longstanding Johnson Amendment that prevents political operatives from soliciting nonprofits and houses of worship for endorsements. If nonprofits are seen as endorsing particular candidates, it could seriously deplete the trust of funders and of those we serve. Stakeholder trust is key for nonprofit human service organizations to fully implement our missions.
The House tax bill has provisions that directly negatively affect low-income earners and families. By increasing the Child Tax Credit but not making it refundable, lower-income earners will not have enough tax liability to take advantage of it. It is only middle income and high earners that would see a larger deduction.
Some of the other directly harmful provisions to low and middle-class earners: Repeals the deduction for medical expenses, hitting families with serious and costly medical conditions
- Repeals the deduction for elementary and secondary school teachers
- Repeals the tax exclusion on adoption assistance programs including those that help with the adoption of special needs children
- Repeals the Work Opportunity Credit, which can currently be claimed by employers hiring welfare recipients
- Repeals the student loan interest deduction
Not all the potential harm this bill could cause is written into the four corners of the Tax Cuts and Jobs Act. While cuts to entitlement programs and funding for human service programs are not written into the tax bill, they are suggested in the recently passed budget resolution that paved the way for tax reform. The resolution calls for cuts to Medicaid, Medicare, education, and infrastructure spending as ways to reduce the $1.5 trillion that would be added to the deficit by implementing this tax plan.
The success of our nation is dependent upon our investment in human potential. Eliminating deductions that working families rely on, not extending increases to deductions to all income earners, reducing supports for health care and education, and reducing the incentive for charitable giving, threaten to take the country in the wrong direction.