Washington Snapshot: Democrats Propose Tax Changes through Budget Reconciliation

What You Need to Know About Public Policy This Week...

• News From the Council
• Democrats Propose Tax Changes through Budget Reconciliation
• IRS Issues Update on Private Foundation Self-Dealing
• Secretary Yellen Warns about Debt Ceiling
• OMB Releases Federal Agency Racial Equity Assessment
• Happening in the States

News from the Council

Earlier this summer, the Council published a roadmap for foundations looking to advance their missions and goals through public policy. Public Policy and Advocacy for Grantmakers is free for Council members. The Council also developed a new resource on preventing funding of hate groups. Check out the free white paper, titled Values-Aligned Philanthropy: Foundations Resisting Hate and Extremism; and online resource center. Register for the accompanying webinar on October 5.

Just announced: Programming for the 2021 virtual Public Policy Summit. See our full schedule and register.

Democrats Propose Tax Changes through Budget Reconciliation

House Democrats have released their budget reconciliation package. Titled the Build Back Better Act, it includes many of the priorities detailed in President Biden’s American Families Plan and American Jobs Plan, including extending the expanded monthly Child Tax Credit through 2025; creating subsidies and credits to encourage the use of clean energy and electric vehicles; and incentivizing affordable housing development. The bill also includes a phase-out of the 1.4 percent excise tax on the net investment income of private college and university endowments.

Democrats proposed a series of revenue raisers to pay for the plan. Democrats say these “pay-fors” will raise over $2.5 trillion over ten years primarily by increasing taxes on high-income individuals and corporations. Among other provisions, these changes include:

• Raising the top income tax rate to 39.6 percent for individuals earning over $400,000 and joint filers earning over $450,000.
• Increasing the top capital gains rate to 25 percent.
• Expanding the net investment income tax to cover net income for taxpayers with greater than $400,000 ($500,000 for joint filers) in income.
• Limiting the Section 199A qualified business income deduction for taxpayers with an income of over $400,000 ($450,000 for joint filers).
• Making permanent the American Rescue Plan’s disallowing of business losses beyond the taxpayer’s business income.
• Imposing a 3 percent surtax on individuals with adjusted gross income in excess of $5,000,000.
• Increasing the carried interest qualifying holding period for capital gains treatment from three years to five years.
• Ending the 2017 tax law’s provisions that doubled the estate and gift tax exemption.
• Modifying the treatment of grantor trusts so they are considered part of their owner’s taxable estate and treating sales between grantor trusts and their owners the same as sales between the owner and a third party.
• Increasing the top corporate rate to 26.5 percent for businesses with income in excess of $5,000,000 and decreasing the rate to 18 percent for businesses with income below $400,000.
• Prohibiting taxpayers from contributing to IRAs once their account balances exceed $10 million and requiring distributions once the value of IRA assets exceeds $10 million.
• Modifying cryptocurrency rules to treat crypto the same as other financial instruments.
• Increasing IRS tax enforcement funding.

The respective committees have been holding hearings on the package this past week with the goal of passing the Build Back Better Act by the end of the month. Congress is also working on finalizing an infrastructure package and must continue federal funding before it expires at the end of September.

IRS Issues Update on Private Foundation Self-Dealing

Earlier this month, the IRS released Revenue Procedure 2021-40, expressing that it will not issue additional letter rulings on private foundation self-dealing.

Secretary Yellen Warns about Debt Ceiling

On September 8, Treasury Secretary Janet Yellen sent a letter to Congressional leadership detailing Treasury’s actions with regard to the debt ceiling, which the U.S. government will hit in the coming months. If the government hits the debt limit, it will default on its loans, likely forcing it to stop paying some government bills and obligations—e.g. salaries of federal employees and certain pensions (read Brookings’ in-depth explanation). Secretary Yellen warned of potentially disastrous consequences if Congress fails to raise the debt ceiling or waits too long to take action, including damaging business and consumer confidence, raising short-term borrowing costs for taxpayers, and negatively impacting the U.S.’s credit rating.

OMB Releases Federal Agency Racial Equity Assessment

In early May, the Office of Management and Budget published a federal register notice requesting information to identify effective assessment methods to determine whether federal agency policies and actions create barriers to equitable distribution of federal services and resources, particularly to those communities that are currently and historically underserved. OMB undertook this effort in response to President Biden’s Executive Order Advancing Racial Equity and Support for Underserved Communities. The summary of this input is now available in the OMB report to the President in July 2021, Study to Identify Methods to Assess Equity.

Happening in the States

Exclusive from our colleagues at the National Council of Nonprofits.

Sales and Use Taxes and Wayfair Today

The 2019 Supreme Court Wayfair decision allowed states to collect sales and use taxes on out-of-state or remote sellers, leading to considerable state legislative attention in the ensuing years and further complicating the tax-exempt status of charitable nonprofits. Since that decision, most states extended their taxes to cover online and other remote sales, which shot up during the pandemic. The resulting increases in sales tax collections were a main factor creating better-than-expected budgets for states. As a result, nonprofits exempt from paying sales taxes in their own states often found themselves liable for taxes elsewhere. This year, lawmakers in Florida and Missouri enacted laws to require remote sellers to collect and remit sales tax to the states. The legislation in Florida went further than most states, requiring deposit of sales tax collections from the measure into the state’s unemployment trust fund, which allowed the state to avoid increasing the unemployment insurance rates for contributing employers.

Additionally, states continued to consider changes to their sales tax laws affecting nonprofits. Utah Governor Cox signed legislation requiring Salt Lake County to set aside a percentage of earmarked sales taxes for certain botanical and cultural nonprofits and institutions located in the county. A bill died in Connecticut that would have exempted personal protection equipment from sales and use taxes for nonprofits. North Carolina lawmakers are considering a bill to exempt most nonprofits from paying sales and use tax when they purchase goods and services. Currently, nonprofits there pay sales tax on their purchases and can apply to the NC Department of Revenue for semi-annual refunds of the taxes they pay, which creates unnecessary red tape and cash-flow issues for nonprofits and state governments alike. A separate measure would exempt nonprofits from collecting and remitting sales tax on the ticket price or admission fees at most fundraising events.

Status of Evictions Moratoriums

Late in August, the Supreme Court struck down the Biden Administration’s eviction moratorium that was intended to prevent evictions through October 3. The Court, in rejecting the moratorium issued by the Centers for Disease Control and Prevention, found that the agency exceeded its authority under law. According to Route Fifty, at least seven states — California, Illinois, Minnesota, New Jersey, New Mexico, New York, and Washington — and some cities have some form of eviction moratorium in place, but several of those are set to expire soon. Newly installed New York Governor Hochul announced plans to convene a special session “to address the impending eviction crisis, given the Supreme Court's decision.” Illinois’ Governor extended that state’s moratorium through tomorrow, September 18. While an eviction moratorium in Oregon expired in June, lawmakers approved a “safe harbor” law that gives tenants until 2022 to pay back rent.