The Minnesota House of Representatives adopted a tax bill that replaces the state’s charitable giving income tax deduction with a tax credit. Neither the Governor nor the Senate has embraced this idea in their tax plans, but MCF is working with nonprofit advocates to oppose the House proposal.
Deduction vs. Credit
Currently, Minnesota taxpayers can reduce their taxable income by deducting charitable contributions. Those who itemize on their federal taxes can deduct all of their contributions, while non-itemizers can deduct 50%.
The House plan replaces the deduction with a credit. Rather than reducing taxable income, the credit would be subtracted from the tax bill after it is calculated. Under the House proposal, taxpayers who contribute $400 or more or who give 2% of their adjusted gross income could claim the credit. The proposed changes are in Article 6 of HF677. *
Advocates for the House plan suggest the bill is a win-win: The credit would create more resources for nonprofits, while also adding $40 million in revenue to the state through tax expenditure savings.
Their theory is that tax expenditures should be used to incentivize new investment, and not to reward people for what they might do anyway, without beneficial tax treatment. It assumes that — because donors donate a similar amount to the same beneficiaries each year — the credit would encourage them to increase their giving.
Unfortunately, the House plan is not supported by any projections that giving would, indeed, increase.
Investment in Civil Society
Supporters of the House plan fail to recognize that some tax deductions exist as an expression of public values, while others are designed to promote economic activity. Alexander Reid, former counsel for the Congressional Joint Committee on Taxation, suggests the charitable giving tax deduction serves to acknowledge that investment in civil society is an essential, core value in democratic society. Therefore, the economic test for the charitable giving tax expenditure’s worth may simply not apply.
MCF and our nonprofit allies oppose the proposed shift from a deduction to a credit because it raises fundamental and substantial policy questions about what makes democratic society work and whether charitable giving should be taxed.
More Conversation Needed
While first floated as an idea in 2009, the House proposal to change charitable giving pretty much came from out of the blue (many think it got added to the tax bill simply to help meet revenue projections). This change affects the revenue stream of nonprofits, which make up 10% of the state’s economy and are essential to creating vital, livable communities. It merits much more deliberative analysis and conversation.
It appears Senate leaders and the Dayton administration do not have much of a political appetite to enact the House charitable giving reforms this year. But the House action clearly points to a need for partners in the state’s independent sector to lead communities in conversations about the role and future of charitable giving in Minnesota.
- Bob Tracy, MCF director of government relations and public policy
* The language in HF677 states that contributions through trusts and estates would not be eligible for the credit. MCF brought this to the bill author’s attention, and she stated this was not her intent. Should the House’s reform advance, the author intends to make contributions through trusts and estates eligible for the credit in conference committee.
This post has been updated to reflect the current location of the repeal of the charitable deduction and establishment of a tax credit in HF677.