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Published in Nonprofits

State lawmakers, nonprofits renew push to restore charitable giving tax credits

BY Sunday, October 11, 2020 03:54pm

State lawmakers advanced a pair of bills last month that nonprofit organizations across Michigan say would help restore charitable contributions to community foundations, homeless shelters and food banks. 

On Sept. 22, the state House passed H.B. 4993 and H.B. 6162, which would restore tax credits for certain charitable contributions to these three types of nonprofits. The credits were eliminated in broad statewide tax reforms of 2011. Both bills passed the House with wide bipartisan support, but face opposition from the state Department of Treasury over lost revenue to state coffers.

Nonprofit advocates say the repeal, which took effect in 2012, had an immediate effect on the number and amount of contributions to these organizations. In the wake of the COVID-19 pandemic, nonprofits say restoring the tax credit would bolster donations in a time of need.

“This is an important opportunity for the state to encourage charitable giving at a time when giving is so needed,” said Mike Goorhouse, executive director of the Community Foundation of the Holland/Zeeland Area. “What makes both of these tax credits powerful is that they are accessible to so many givers.”

As passed the House, the bills would amend the state Income Tax Act to issue a credit equal to 50 percent of the amount contributed to community foundations’ endowment funds as well as “shelters for homeless persons, food kitchens, food banks, or other entities that work to provide overnight accommodations, food, or meals to indigent people,” according to a legislative analysis.

The amount credited to taxpayers could not exceed $100 for individuals and $200 for joint filers. For estates or trusts, the credit couldn’t exceed 10 percent of the tax liability for the year or $5,000, whichever is less. The bills would also require the Department of Treasury to annually report the amount of tax credits claimed.

The tax credits were repealed during the early years of former Gov. Rick Snyder’s administration as part of a 2011 bill package that replaced the Michigan Business Tax with the Corporate Income Tax.

Efforts to restore the tax credits passed the House in the 2017-2018 legislative session but failed to advance in the Senate.

Bill supporters say incentivizing giving of smaller amounts leads to long-term contributions from relatively small donors.

“We know charitable tax incentives work — when they’re gone they do diminish giving,” said Kyle Caldwell, president and CEO of the Council of Michigan Foundations. “When incentives are in place and structured to create equitable opportunities for people to engage in philanthropy, it creates a long-term pipeline.”

Caldwell said the tax credits — which first took effect in the 1989 tax year — were meant to incentivize giving from first-time contributors.

First-time donors

According to a 2014 study by Grand Valley State University’s Dorothy A. Johnson Center for Philanthropy, $200 donations declined 44 percent in the two years after the Michigan tax credits were repealed. The number of first-time donors at the $200 level declined 37.5 percent during the same period.

The Johnson Center conducted a similar study a year earlier that found a 51-percent decrease in $400 donations, a 28-percent decrease in $200 donations, and a 27-percent decrease in all donations under $400 immediately. The change resulted in a loss of $1.15 million in donations the year after the repeal.

More than half of the community foundations surveyed in the Johnson Center report indicated the tax credit repeal had a “significant” effect on their organization, according to the study.

The Battle Creek Community Foundation testified in December that the organization has lost $100,000 a year in contributions since the tax credits were repealed. The Grand Rapids Community Foundation reported a drop in $200 donations from 353 in 2011 to 170 in 2013, and a drop in $400 donations from 427 in 2011 to 91 in 2013. Overall, GRCF saw a 70-percent decrease in the total value of gifts at the $200 or $400 level from 2011-2013.

“We found that the biggest impact was a reduction in first-time donors,” Johnson Center Executive Director Teri Behrens told MiBiz this month. “We know that once a donor makes one contribution to an organization, they are more likely to give again, often in larger amounts. The loss of new donors therefore can have bigger and bigger negative impacts over time.”

“Renewing the tax credit has the potential of encouraging new donors to these organizations,” Behrens added, noting that a $300 deduction on federal taxes was included in the CARES Act, which could further incentivize giving.

Caldwell said while national trends show more large-scale donors generally, “Incentivizing giving early helps create that longitudinal sustainable funding we hope for all nonprofit organizations.”

Additionally, incentivizing donations to endowed funds means they will compound with interest and grow with the market, Caldwell said.

Goorhouse noted that as the credits were in place for more than 20 years: “Some consistently gave at the $200 and $400 levels but have also planned to make gifts to our community’s endowment through their estate plans. The tax credit provided the entry point for these supporters, which is so critical.”

Revenue concerns

The Michigan Department of Treasury voiced opposition to the current bills during the committee process. In December 2019, Rachel Richards — former director of Treasury’s Office of Legislative Affairs — told a House committee the department’s “main concern is currently around the cost of the legislation.” (A spokesperson told MiBiz last week that the department’s position hasn’t changed.)

According to the House Fiscal Agency, the tax credits could reduce net income tax revenue for the state by “potentially $25 million or more on a full-year basis, assuming contribution levels similar to those in tax year 2011.” The homeless shelter and food bank credits would account for most of that, or nearly $20 million a year. The revenue losses would be absorbed by the state’s general fund.

Council of Michigan Foundations officials believe the House Fiscal Agency’s analysis is inaccurate and based on bills from a previous session that would have included more nonprofit organizations like museums and zoos.

While the state is concerned about lost revenue, and likely more so as a result of the pandemic that has strained the entirety of the state’s general fund, Goorhouse said encouraging charitable giving for community endowments and basic needs like food and shelter is crucial at this point.

“The last six months have been the perfect showcase (in an unfortunate way) of the importance of local food banks and homeless shelters, as well as the critical role that endowments at community foundations play in helping communities be resilient to fast changing needs,” Goorhouse said in an email. “It is not a pretty picture to think about our communities without food banks, homeless shelters and community foundation endowments these last six months.”

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