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Nonprofits nervous about proposed Minnesota tax change on charitable contributions

Photo by Paul Battaglia
Rep. Ann Lenczewski previews the House omnibus tax bill April 24 with House Majority Leader Erin Murphy and House Speaker Paul Thissen.

Minnesota nonprofits are watching nervously to see if a potentially bitter pill ends up in the omnibus tax bill that eventually lands on the desk of Gov. Mark Dayton.

Their concern centers on a proposed change in the tax benefits Minnesotans get when they make charitable contributions.

The current House bill calls for replacing the current state “tax deduction” with a “tax credit.” 

More importantly, they worry the change could mean that Minnesotans might be less motivated to donate because the current state tax break would be substantially cut.

Those fears, though, might not come true even if the change becomes law, given that taxpayers would still find it financially advantageous to deduct charitable contributions on federal returns when itemizing.

In a year in which DFL legislators are looking everywhere for revenue, the House plan would bring in an extra $44 million in the next biennium just from the change in how deductions for donations would be calculated.

House alone on change

At this point, the change does not appear in either the Senate’s tax bill or the governor’s proposal.

But strange things happen in the final weeks of the legislative process. What doesn’t appear today can suddenly sprout tomorrow.

Uncertainty rules this session over what a final tax bill will look like, given that the Senate, House and governor all have different plans.

Senate Majority Leader Tom Bakk addressed that uncertainty — which looks like chaos to many — in a statement earlier this week.

“Like any negotiations, even negotiations back in your family, they work best when everybody gets a little something they want, and I think that will be the final outcome of this session, too,” Bakk said.

That means something like the change in calculating charitable deductions could end up in the final bill. 

Disclaimer: MinnPost, like other nonprofits that rely on donations, could be affected if the House version prevails.

Deduction vs. credit

What the House is proposing seems simple: A “deduction” reduces taxable income. A “credit” reduces taxes owed.

The House plan, however, also seems to make a relatively simple deduction system far more complex. Currently, when taxpayers itemize, any donated amount is deductible on state and federal returns. That would change in the House proposal.

Proponents of the change say that people shouldn’t need to be motivated with tax breaks to be charitable.

Supporters — including Rep. Ann Lenczewski, the chair of the House Taxes Committee and bill sponsor — also argue that the proposal levels the playing field between those who itemize and those who don’t.

About 60 percent of state taxpayers do not itemize.

Additionally, proponents say that the current system is not progressive. People in the highest income tax brackets receive a higher percentage benefit than those in lower brackets.

With the new system, however, taxpayers in all brackets would take hits.

Some examples

This can be eye-glazing stuff, but try some examples:

• The current system: What happens now when an itemizing joint filer in the lowest income bracket donates $1,000.

There’s a 5.35 percent rate for the lowest bracket, which includes married couples with a taxable income of less than $35,480. The filers in that bracket receive a tax benefit of $53.50 for their donation simply by multiplying their bracket, 5.35 per cent, times their donation, $1,000.

If a couple from the highest bracket – 7.85 percent on a taxable income of more than $140,960 – donates $1,000, they receive a tax benefit of $78.50.

The new system: Things would become more complex and less beneficial to the taxpayer. 

It becomes a system that includes multipliers and thresholds, a system in which adjusted gross income, not taxable income, becomes a factor.

Take that low-bracket couple in the first case, the couple that received a $53.50 benefit under the old system. In the new system, they’d only get an $8 benefit.

Meanwhile, the couple in the highest bracket that received a $78.50 benefit in the current system would get nothing in the new.

How all that happen gets heavy, unless you love tax talk.

Start with the low-income filers. Now we have to figure that couple’s adjusted gross income. For the sake of the example, say that their adjusted income was $45,000 before deductions dropped them into the lowest bracket.

Under the proposed formula, they would receive an 8 percent credit for contributions made in excess of the greater of $400 ($800 for joint filers) or 2 percent of adjusted gross income.

In this case for our low bracket, 2 percent of the filer’s adjusted gross income is $900. The couple then would subtract that $900 from the $1,000, which amounts to $100. They then would get 8 percent of that figure, or an $8 tax credit.

Some lose out

In our first example, the high-income filers who donated $1,000 would get no credit because of that 2 percent threshold.

So, given that high-end donors are a key to the survival for many nonprofits, try one more example in which a benefit does kick in.

Take a couple, itemizing and filing jointly, with a gross income of $175,000.

Even with deductions, that couple might remain in the current top bracket. If that couple donated $5,000, the formula would work out like this: 2 percent of the $175,000 would amount to $3,500. Subtract that figure from the $5,000 contribution, leaving $1,500. The couple now gets a tax credit of 8 percent of the $1,500, which amounts to $120, as opposed to $392.50 deduction under the current system.

Non-itemizers, who currently get a charitable deduction benefit for 50 percent of contributions in excess of $500, would lose a tax benefit under the proposed system.

This proposal has been floated before.

Four years ago, the House Taxes Committee came up with a massive tax reform package, including this plan for donations. But in that case, there was a large crowd of special interests howling in unison.

This time, House reforms are not nearly so broad, meaning the nonprofits have fewer allies to oppose the plan.

The approach of the nonprofits appears to be one of diplomatic resistance.

In a notice to its members, the Minnesota Council of Nonprofits tried to both praise the DFL while raising concerns.

The praise: “After years of budget cuts, the Minnesota Council of Nonprofits and the Minnesota Budget Project and many nonprofit organizations are pleased to see there will be revenue raised, progressively, to solve this year’s deficit and start to get the state back on track in spending priorities.’’

The concern: “We are concerned that this change [in the benefit for charitable giving] would result in some Minnesota donors who currently receive a tax benefit not being eligible for the new credit with an unknown and potentially risky reduction in charitable giving.”

Comments (9)

  1. Submitted by Mike Schumann on 05/03/2013 - 11:03 am.

    Charitable Tax Credit

    This is an absurd proposal. Does anyone in government care about the complexity of filling out your tax forms????? I’m much less concerned about how much tax I pay than how much time it takes to fill out the forms!!!!

  2. Submitted by jody rooney on 05/03/2013 - 11:37 am.

    This article is why Mr. Grow has always been one of my favorite

    journalists. He takes the care to explain policy implications on an easily understood although still eye glazing level.

    Thank you for a very good article.

  3. Submitted by John Ferman on 05/03/2013 - 11:57 am.

    Charitable Tax Deduction Changes

    Some 30 to 40 years ago, the Minnesota tax return was a nightmare of complexity. Remember how each spouse had a single column and their incomes and deductions were handled separately and then combined at the end in a comolicated way. The citizenry got up in arms and forced a change to simplification. Now, the Legislature is forcing complexity back into the income tax system. It isn’t just the non-profits that lose, it is individuals that lose also. The only winners I can see would be the tax consultants, attorneys and H&R Block. This past year, Turbo Tax got Minnesota wrong, what do you think next year will be like? This article needs very wide spread advertisement.

  4. Submitted by Patrick Johnson on 05/03/2013 - 11:58 am.

    Fear may not Come True?

    “More importantly, they worry the change could mean that Minnesotans might be less motivated to donate because the current state tax break would be substantially cut.

    Those fears, though, might not come true even if the change becomes law, given that taxpayers would still find it financially advantageous to deduct charitable contributions on federal returns when itemizing.

    In a year in which DFL legislators are looking everywhere for revenue, the House plan would bring in an extra $44 million in the next biennium just from the change in how deductions for donations would be calculated.”—

    Stop right there. No need to complicate things any further. Obviously, if the state expects to get $44 million more, that money will come from taxpayers who contribute and use the deduction. It will be a substantial cut in the tax breaks for donors and it WILL have an affect on charitable contributions. Anyone who says otherwise is delusional.

    These Democrats are delusional if they believe the policies they are advancing this session won’t have consequences, unintended or not. I tell you all now, charitable contributions will drop due to this change. To believe otherwise is to ignore economics and human behavior.

  5. Submitted by James Hamilton on 05/03/2013 - 12:12 pm.

    Then again,

    we could simply eliminate charitable deductions, credits and tax exemptions entirely, so that only those of us who endorse specific organizations support them. I, for one, do not feel the need provide financial support to the churches of Minnesota. I’m certain others would like to eliminate their financial support for the organizations I endorse.

    An opium dream, I know.

  6. Submitted by Connie Sullivan on 05/03/2013 - 02:58 pm.

    Doug Grow should have consulted one of the MinnPost economics writers who know how to present tax issues more clearly than this article does. I do my own taxes, and this is a mishmosh of not really helpful examples that aren’t preceded by a clear statement of the changes.

    I agree with those who predict that this ill-advised bill will decrease what is given to charities. Aside from those who give $5 to somebody who comes asking at the front door, those who give substantial sums to charities do it partly for tax purposes. That’s tradition, and a lot of us actually plan for it. The non-profits do depend on that tax benefit to their donors. Bad idea to cut that tax benefit.

    And then there’s just the double-edges of the (1) non-compliance with federal tax law problem, and (2) the complexity of the so-called solution: a tax credit. This adds a complicated and obscure second or third step to tax return calculations for any and all who give to charities. What are the House reps thinking?

    Democrats know that where they have to get new tax money is by raising the income tax rates on those with Real Money Coming In Every Year. This tax thing attacks charities and has all the appearances of a ruse to confound taxpayers.

    • Submitted by James Hamilton on 05/03/2013 - 04:26 pm.

      I disagree.

      This is not an “attack on charities”, though it may affect them.

      It’s worth noting that charities existed long before the federal income tax was created. It’s fair to assume that they’ll survive without a tax break, though some of the salaries, perks and offices of major charitable non-profits may have to be adjusted.

      Read this for a peek at the ineffficiencies in some charitable organizations:

      http://www.charitywatch.org/articles/cancer.html

      “The famous American Cancer Society (ACS), which reaps far more contributions ($848 million in 2005) than any other cancer charity that AIP covers, is only able to get 60% of its budget to program services not related to solicitations and receives a C+ grade from AIP.”

  7. Submitted by Gail O'Hare on 05/03/2013 - 07:55 pm.

    Charitable deduction tinkering

    We deduct checks we write to charities but don’t even bother with all the stuff I buy for free stores and local charities that distribute shoes and socks, cosmetic items, gloves, etc. So in a sense, I think the deduction vs. credit issue won’t matter much for us. At the other end of the financial spectrum, big donors want to be seen at the galas and balls, so their contributions won’t change dramatically. Charity for them is more social than moral and ethical.

    But all these machinations in the Legislature will have financial consequences, as Patrick Johnson said. For example, the increased cigarette tax will mean my husband and I will make no more political contributions, which aren’t even deductible, so the tax issue doesn’t matter. But we contributed quite a lot to progressive candidates and causes in 2012, and now we just won’t have the money. Nothing for non-profit journals and news outlets either. When Obama raised the cigarette tax to pay for SCHIP, we dropped our season tickets to the MN Opera. Wherever and however you raise costs on middle-income people, they will weigh their choices and cut something.

    John Cowles, of the media and arts Cowles family, might agree with Hamilton’s point on charities. From Wiki: In a 2006 essay written at the University of Minnesota Hubert H. Humphrey Institute of Public Affairs, Cowles wrote, “The nonprofit sector must reform itself, most notably by initiating some minimum federal standards of behavior and by limiting the lifespan of private foundations to 25 or 30 years so that emphasis is on accomplishment, not process and perpetuation.” Many non-profits budget largely to keep themselves going. If they lose out on this issue, perhaps they need to examine their own worth to the community.

  8. Submitted by Rebecca Hoover on 05/04/2013 - 11:24 am.

    Charitable???

    I usually review the 990 forms (income tax filings) of so-called charities before contributing. These are available for viewing for free at Guidestar.org. After seeing how much many so-called charities pay their management, I’ve largely stopped contributing to these so-called charities and I just give money to those I know who are truly in need. I don’t think charity is the right word to describe a lot of these organizations. Accordingly, I am actually in favor of eliminating tax breaks for these contributions altogether. It’s ridiculous too that many give a bunch of old junk to Goodwill and then claim a big deduction. This charitable contribution business seems like a racket.

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