The nonprofit sector continues to fixate on lawmakers and lawmaking in a paralyzed-by-gridlock Washington, D.C. while the real action during this difficult period in our nation is at the state and local level.
It’s almost like a malevolent magician is waving a magic wand: “Don’t look there; look over here!”
But along comes David L. Thompson, Vice President of Public Policy of the National Council of Nonprofits (NCN), to remind us once again of that organization’s “mantra”: that is, “the action’s in the states.” Just after the first of the year, he wrote Nonprofit Policy Action In The States For 2020 (January 14, 2020) for The Nonprofit Times.
Mr. Thompson is based in Washington, DC, but – along with the others at NCN – pays considerable attention to what’s happening outside of the Beltway. In NCN’s newsletters – Nonprofit Advocacy Matters and Nonprofit Knowledge Matters – we are reminded repeatedly to pay attention to current and proposed laws and rules from state houses around the nation, along with county administration buildings and city-council chambers. Subscribe to these important publications, free-of-charge, for delivery to your email inbox, or check out the website for archived issues.
The Action’s In the States
In his January 14th article, NCN’s Thompson points out three “key trends” in the states that “rise to the top of the agenda,” the selection having been based on “extensive tracking and engagement at the state level.”
“So what actions,” he asks rhetorically, “ do nonprofits have to look forward to or fear in 2020? They are:
- Expanding charitable giving tax incentives
- Shrinking tax exemptions
- Expanding state-specific workplace policies.
None of the three items is brand new this year; in part based on news and updates published by NCN, we’ve mentioned them in our earlier posts in 2019 and before.
But there is continual action: In the states, “… legislation and policy ideas move through the system at breathtaking speed and the number of bills passed outnumber the productivity of Congress by a 77 to 1 margin.”
State Focus Areas
Charitable Giving
It’s clear now, two years after passage of the federal Tax Cuts and Jobs Action of 2017 (TCJA), that the sudden and unexpected doubling of the standard deduction has reduced donations to charities. See, for example, Tax Act Impact on Charities: New Report (May 8, 2019).
While this change has had an impact across the board, the effect has been particularly difficult for small and mid-size organizations. Since this law took effect, state lawmakers have tackled the issue of what to do about it, focusing on where it “presents legislative opportunities.”
For instance, Arizona enacted a new deduction at the state level for taxpayers who are now – or always have been – non-itemizers. It provides a new 25 percent deduction for contributions to charitable nonprofits. Other states have followed this path – or are looking at taking similar action. Colorado and Minnesota, for example, now give extra incentives for standard-deduction taxpayers.
Mr. Thompson reports that “… North Carolina legislators continue efforts to restore a state-level equivalent of the IRA charitable rollover that allows tax-free distributions from retirement accounts to charitable organizations.” There is also activity on this front in the New Jersey legislature.
He warns, though, that “states can also get stingier when it comes to promoting charitable giving through their tax codes.” The key example he cites is Vermont, which in 2018 eliminated its existing charitable deduction that had been on the books for many years, replacing it with “very limited tax credits.”
Then there are the “SALT workarounds.” Long story short: The TCJA enacted a $10,000 cap on taxpayers’ ability to deduct their state and local taxes, so some states established charitable funds as a way to work around that cap. In June 2019, the federal government released rules that “would largely put a stop to these new charitable funds.” In response, New Jersey, New York, and Connecticut filed suit against the IRS.
Non-Federal Tax Exemptions
We’ve written quite a bit about the move by states as well as local governments to play around with long-standing property and sales tax deductions so they can eke out every last nickel and dime from the taxpayer base. This includes poking into the non-taxpayer base as well; that is, the nonprofit organizations.
In the property-tax arena, the hottest topic are PILOTS (“payments-in-lieu-of taxes”) which are “voluntary” payments by large nonprofits in certain localities that both own huge swaths of real property and also consume large amounts of public services like police and fire protection. In PILOT Pressures for Major Nonprofits (February 19, 2020), we recently revisited this trend. Cities including Boston and Baltimore are having second thoughts about the voluntary nature of these agreements; the large and prestigious educational institutions there are falling short of their obligations.
NCN’s David Thompson notes that “bills to tax nonprofit properties and/or impose municipal fees can be expected again in 2020 in Connecticut, Massachusetts, Montana, South Carolina, and elsewhere as lawmakers seek to raise revenue or cut someone else’s taxes in an election year.”
Then there are sales taxes; in many states, nonprofits have traditionally had partial or complete exemptions. But the mid-2018 Supreme Court decision in South Dakota v. Wayfair pushed the issue of internet sales front and center. We’ve covered those developments in Wayfair: How Is It Affecting Nonprofits? (October 15, 2019), including how it is affecting nonprofits in California.
More generally, “for the 2020 legislative session,” cautions David Thompson, ”Utah intends to adjust income and sales taxes to ‘address the state’s structural revenue imbalance.’” Similarly, “Nebraska lawmakers will soon release a plan to reform and cut property taxes and make adjustments to income and other taxes to fill the likely billions in lost revenue. More tax reform plans will surely be pre-filed in the coming weeks.”
Mr. Thompson anticipates and answers the question of why tax-exempt organizations should “… care about how others who are taxed end up being taxed?” He answers: “Because tax reform efforts almost always turn on backroom deals, announced at the 11th hour, that impose new taxes on unsuspecting entities. It happened to nonprofits in Louisiana in 2016 and Kentucky in 2018 (both of which were subsequently reversed thanks to advocacy). The lesson learned is to engage early and stay late to protect nonprofit interests.”
State Employment Laws
While most nonprofit organizations boards and staff pay strict attention to tax issues, they frequently neglect entirely the more general laws passed by states and local governments including those that apply to employers. Not all nonprofits have employees, but most do.
“Perhaps the greatest growth area in state legislation,” notes David Thompson, “has been in efforts to raise workplace standards and expand employee benefits.” More than half of the states already have minimum-wage laws at rates much higher than the long-standing federal minimum-wage rate of $7.25 an hour.
Similarly, the new federal overtime hike will affect many nonprofits and their employees. We’ve noted already in our coverage of the overtime issue, see here (most recently), that several states including California, Maine (rising to $36,000 next year), New York, and Pennsylvania already have higher salary thresholds than even the new federal rate. Other states including Washington and Michigan and others are about to have higher rates or are planning them soon.
There are many other areas in which the states have been active in worker-related laws. Among the hottest topics in this category is paid family and medical leave. “Maine enacted a law requiring employers, including nonprofits, with 11 or more employees to provide paid leave up to 40 hours per year for employees.” Other states are considering it.
Conclusion
These three subject areas — charitable-giving incentives, taxing tax-exempts, and workplace policies — are the key targets of state action in 2020 that affect nonprofits. But they aren’t the only ones. “Spending decisions, as always, will create winners and losers; and in states with declining economies, more nonprofits tend to be losers. The 2020 census still needs extra help from the states and their nonprofit partners.”
Of course, in a state like California with a large surplus, nonprofits should be paying careful attention to the ways in which they can benefit from actual and proposed spending hikes including – particularly – for social services. See CA’s New Budget: Boon to Nonprofit Sector (July 9, 2019).
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