Coverage of legislation and regulatory activity that affects higher education
By Liz Clark
- Obama Proposals Target Charitable Deduction, Tax-Exempt Bond Interest
- Protecting Pell Grants Comes at a Cost
In September, President Obama presented Congress with the American Jobs Act of 2011, which reflected his job creation plans. A second proposal, Living Within Our Means and Investing for the Future: The President's Plan for Economic Growth and Deficit Reduction, outlines a path forward to achieve sufficient cost savings to pay for the American Jobs Act and achieve $3 trillion in savings over the next decade. Both legislative plans call for new limitations on the charitable deduction and the tax-exempt bond interest exclusion.
NACUBO is concerned that colleges and universities, as well as other nonprofit organizations, will bear the brunt of a cap on or reduction in the charitable deduction.
NACUBO has urged members of the Joint Select Committee on Deficit Reduction—known as the supercommittee—to reject the charitable deduction and tax-exempt bond interest proposals, as the committee works to craft the federal deficit reduction plan that must be reported to Congress by November 23.
Donation Deductibility Limits
This is the fourth time since taking office that President Obama has called for further limits on the deductibility of charitable contributions; he first put forward this proposal as a part of his plan to pay for comprehensive health-care reform. Specifically, for taxpayers who itemize and earn more than $200,000 per year as an individual, or $250,000 as a couple filing jointly, the Obama administration would limit at 28 percent the value of the charitable tax deduction.
While the proposal is targeted to increase the tax paid by wealthier individuals, NACUBO is concerned that colleges and universities, as well as charities and other nonprofit organizations, will bear the brunt of a cap on or reduction in the charitable deduction. A 2009 study by the Center on Philanthropy at Indiana University, estimated a drop in giving of 2.1 percent had these proposals been in place in 2006. However, many questions still remain about the impact on giving that such a change in the tax code might cause.
In June, the Bill & Melinda Gates Foundation awarded a $1 million, three-year grant to the Urban Institute to (1) study the ways that reducing or eliminating the charitable deduction might affect charities, and (2) examine the impact on charitable organizations of revoking property tax exemptions, simplifying the excise tax, and requiring foundations to give away more of their money each year. The Gates-funded study, released on October 7, indicates that President Obama's plan to limit the charitable deduction for wealthy people would cost nonprofits at least $2.9 billion—and perhaps as much as $5.6 billion.
Others have also proposed alternatives to the charitable deduction: The Rivlin-Domenici Debt Reduction Task Force recommended eliminating the charitable deduction for individual taxpayers and replacing it with a tax credit; the so-called Gang of Six also would have gotten rid of the charitable deduction, replacing it with a tax credit—but only if the filer donated to charity 2 percent or more of his or her adjusted gross income.
Legislators on Capitol Hill have not been quick to embrace President Obama's proposal—House Majority Leader Eric Cantor (R-VA) labeled it a "tax on soup kitchens." However, because it is a tax benefit perceived to be enjoyed by wealthy taxpayers, some liberal organizations have been actively supporting the president's plan to change the deduction. The Congressional Joint Committee on Taxation estimated the charitable deduction, as written in current law, will cost the U.S. Treasury $230 billion in lost tax revenue between 2010 and 2014, a sum supercommittee members will find hard to ignore as they try to identify as much as $1.5 trillion in federal deficit reduction.
Interrupting Muni-Bond Interest Income
Also a part of President Obama's proposals this fall was a call to limit tax-exempt interest on municipal bonds. For taxpayers who earn more than $200,000 per year as an individual, or $250,000 as a couple filing jointly, his plan would limit to 28 percent the amount of earned interest that can be excluded from income. Municipal bond investors in higher tax brackets would pay a new tax on previously exempt income.
While a similar recommendation had been included in the report of the National Commission on Fiscal Responsibility and Reform, also known as the Simpson-Bowles plan, this was the first time a proposal had been put forward that would limit the interest earned on all municipal bonds and not solely on newly issued bonds.
Bond issuers are also concerned with an additional element of the Obama debt reduction plan: a proposal that would trigger automatic reductions or limitations in certain tax rules, such as the exclusion for tax-exempt interest, in the event that certain financial targets are not met. If the government were to implement this budgetary mechanism, the limit on the value of tax-exempt interest would become unpredictable and could change annually. Should the proposal become law, tax planning for investors would become difficult, if not impossible, and tax-exempt bonds are likely to become harder to market and ultimately more costly.
Some issuers are also concerned that under the Obama proposal, if relevant covenants are in place on existing bonds, bondholders might be able to re-open contracts in search of more profitable interest rates. With or without the covenants, under the Obama proposal, municipal bond investors are likely to seek higher yields on future offerings, thus increasing borrowing costs for issuers.
As with the charitable deduction proposal, there is no large groundswell of support for limiting the tax-exempt bond interest exclusion. However, many tax writers on Capitol Hill have long eyed with skepticism the issue of tax-exempt bond financing. Some members would prefer to reinstate the Build America Bonds program or other direct-subsidy mechanisms, thus keeping infrastructure costs down for state and local issuers and avoiding giving a tax break to typically wealthy municipal bond investors.
What supercommittee members may find difficult to resist is the deficit savings they might find in Obama's proposal. The Joint Committee on Taxation estimates that the tax-exempt bond interest exclusion, as written in current law, will cost the U.S. Treasury more than $200 billion in lost tax revenue between 2010 and 2014.
NACUBO CONTACT Liz Clark, director, congressional relations, 202.861.2553
Over the past year, student aid benefits have steadily eroded, as legislators eliminated LEAP funding, year-round Pell Grants, the in-school interest subsidy for graduate students, and student loan repayment incentives—all aimed at covering the Pell Grant shortfall and contributing to deficit reduction. While proposals emerging from the House this year have been more dramatic, both chambers are on track to continue this trend.
Over the past year, student aid benefits have steadily eroded, all to cover the Pell Grant shortfall.
In September, Senate budget writers advanced a plan protecting the $5,550 maximum Pell Grant award, but in order to meet their budget targets, the plan would eliminate the federal subsidy on interest accrued during the six-month grace period on undergraduate loans.
So far this year, House appropriators have twice postponed scheduled markups of the FY12 Labor, Health and Human Services funding bill (which includes funding for education). In late September Rep. Denny Rehberg (R-MT), the chairman of the House subcommittee that oversees the bill, released draft legislation that would also protect the $5,550 maximum award, but calls for several programmatic changes that would:
- Eliminate Pell eligibility for students attending less than halftime.
- Eliminate eligibility for awards that are less than $555.
- Reduce Pell use from 18 semesters to 12, starting July 1, 2012.
- Reduce the threshold for automatic zero Expected Family Contribution from $30,000 to $15,000.
- Expand the definition of "untaxed income" to include five items that are currently not included as income.
The House proposal significantly reduces or eliminates funding for a number of other higher education programs. It would also prevent the Obama administration from implementing and enforcing the new "gainful employment," "credit hour," and "state authorization" rules.
These numbers are not final, and the Republican-led House and the Democratic-controlled Senate will have the difficult task of finding common ground before sending final FY12 spending legislation to President Obama in what will likely be an omnibus appropriations measure. The new federal fiscal year actually began on October 1; the federal government is currently funded through November 18 on a temporary measure. None of the 12 annual appropriations bills has been completed.
NACUBO CONTACT Liz Clark, director, congressional relations, 202.861.2553