CCP Policy Update: State Budget and Federal Tax Reform

Thursday, November 9, 2017

We wanted to provide updates and analysis on the 2-year state budget bill and the Tax Cuts & Jobs Act tax bill introduced in the House last Thursday.

State Budget

Last week, Governor Malloy signed into law the state biennial plan, but used a line item veto to reject the hospital tax plan. Lawmakers are anticipated to make a fix to the line item that would increase federal Medicaid reimbursements to the state. Other highlights include:

  • Reduces state payments for municipalities and education
  • Raises income taxes on middle class and working poor households by reducing tax credits
  • Cuts operating funds for the University of Connecticut
  • Raids $87.5 million per year from three energy conservation programs
  • Offers assistance for the capital city, but does not prohibit Hartford from filing for bankruptcy protection

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Federal Tax Reform

The House tax committee started work on the filed bill this week, and the full House is expected to vote on it next week without amendments. The Senate is expected to release its separate version in mid-November. The stated goal of Republican leaders is to have a bill on the President's desk by Christmas for signing before New Year's Day. (National Council of Nonprofits)

Two provisions threaten "lifeblood" of nonprofits

Although there are many provisions that directly impact tax-exempt charities, Tim Delaney of the National Council of Nonprofits, identifies two provisions that threaten the viability of nonprofits:

  • weakening of the Johnson Amendment (nonpartisanship) and
  • diminishing the tax incentive to contribute to the work of charitable nonprofits to all but five percent of Americans.

"Nonpartisanship and charitable contributions are the lifeblood of organizations that serve every American every day."

The Nonprofit Quarterly in their tax bill analysis, opines that "the tax reform bill should be defeated based on this one provision alone."

Taxing Tax-Exempts to Pay for Tax Cuts (from Nonprofit Quarterly)

The House legislation would cut taxes by $4 trillion to $5 trillion over a ten-year period, but only increases the federal deficit over a decade by $1.5 trillion, give or take a few billion dollars. This supposedly is done by repealing loopholes, "eliminating costly deductions that drive up taxes," and, in numerous ways, targeting tax-exempt entities with a host of revenue raisers: Endowments (§ 5103); Executive Compensation (§ 3803); Unrelated Business Income Tax (UBIT) (§§ 3308, 5001-5002); Foundation Excise Tax (§ 5101).

Provisions that Affect Individuals

Bloomberg Business Week reports that personal tax changes in the bill:

  • Kill the deduction for interest on student loans, repeals two tuition tax credits, and ends the tax-free status of employer tuition reimbursements.
  • Eliminate the deduction for state and local taxes, except for $10,000 a year in property taxes -- bad for high-tax blue states such as New York, New Jersey, California, and Connecticut.
  • Are bad for big families as the standard deduction roughly doubles, to $24,000 in the case of a married couple. But personal exemptions of $4,050 per person would go away.

Business Insider compares calculations on how the new tax plan would affect a Family of four with two children under 17, at 3 different household incomes, $25K, $75K and $175. The bottom income would actually have their taxes increase.

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