President’s FY 2013 Budget Proposal and the Nonprofit Community

Dear IS Policy Advocates:

President Obama has released his $3.8 trillion FY 2013 budget proposal to Congress, outlining both the Administration’s near-term investments and longer-term priorities. Below is a brief summary, including key points of interest to the nonprofit and philanthropic community.

We continue to evaluate the president’s budget proposal in light of Independent Sector’s Guiding Principles for Deficit Reduction and Tax Reform, which favor policies that will not exacerbate income inequality or increase poverty. Further updates and analyses are available on the IS website, including updated summaries of key budget provisions. Our policy team will continue to update our resources throughout the week as more information becomes available.

Tax Issues:
The budget proposes raising over $1.5 trillion in new revenue over the next ten years. The largest portion of new revenue would be raised by allowing the 2001 and 2003 tax cuts for individuals earning over $200,000 ($250,000 for families) to expire and returning the top two income tax rates to 36% and 39.6% percent to raise $848 billion over 10 years. Tax rates would remain unchanged for taxpayers earning under those thresholds.

Tax provisions of particular interest to the nonprofit and philanthropic community include the following:

  • 28% Cap on Itemized Deductions – For the fourth consecutive year, the president proposes capping itemized deductions, including the charitable deduction, for individuals earning over $200,000 a year ($250,000 for families). Combined with a similar reduction in the value of other tax preferences for higher-income earners, including tax deferrals for income contributed to retirement plans, the proposal is estimated to raise $584 billion over 10 years. Independent Sector opposes this provision because it reduces the incentive for charitable giving.
  • Buffett Rule – As a principle for broader tax reform, the budget calls for the elimination of the Alternative Minimum Tax and the establishment of the so-called “Buffett rule,” which would impose a minimum 30% effective tax rate for taxpayers with income over $1 million. While the Administration notes that the Buffett rule should be implemented in a way that is equitable, “including not disadvantaging individuals who make large charitable contributions,” it is unclear at this point how exactly it would interact with the charitable deduction, as no revenue estimate is provided in the budget. Independent Sector appreciates that the provision, as described, recognizes the critical difference between the tax deduction for charitable giving which incentivizes taxpayers to help others through nonprofit organizations, and other tax deductions and exclusions that subsidize spending which personally benefits the taxpayer.
  • Estate Tax – The president proposes reinstating the estate tax at 2009 levels ($3.5 million exemption; 45% rate) once the current levels ($5 million exemption; 35% rate) expire at the end of this year, to raise $118 billion over 10 years. Independent Sector supports this provision, as it increases the incentive to make charitable gifts through estate planning.
  • Charitable Extenders – The budget proposes the reinstatement of the IRA charitable rollover, as well as incentives for the donation of real property for conservation purposes, book inventory, computer inventory, and food. Independent Sector supports the continuation of these tax incentives for charitable giving, and believes that they should be made permanent in order to facilitate long-term financial planning and maximize the incentive effect.
  • "Pease" Limit on Charitable Deductions – The budget assumes the reinstatement of the limit on itemized deductions (known as Pease after the congressman who created it) that reduces itemized deductions by 3 percent of the amount by which Adjusted Gross Income exceeds a specified threshold, up to a maximum reduction of 80 percent of itemized deductions. The provision, first instituted in the tax code in 1990, was phased-out over 10 years beginning in 2001 and was fully repealed in 2010. With no changes to current law, the Pease provision would return with the expiration of the Bush tax cuts in 2013. In 2012, the provision would have affected single taxpayers with adjusted gross incomes of $173,650 or higher; married joint filers with incomes of $260,500 or more. The proposal would raise $123 billion over 10 years.
  • Private Foundation Excise Tax – The budget proposes a single, 1.35% rate to replace the current two-tiered structure for the private foundation excise tax. Independent Sector supports a single rate private foundation excise tax.
  • 10 Percent Tax Credit for Adding Jobs and Increasing Wages – The budget proposes a temporary tax credit that gives qualifying employers that add jobs and increase wages a tax credit equal to 10% of wages up to $500,000. Independent Sector supports making hiring incentives equally available to nonprofit and for-profit employers. In previous administration proposals, these incentives have been made available to nonprofit employers at reduced rates, and by characterizing the hiring incentives for nonprofits as “similar” to for-profits, it appears this proposal may continue to treat nonprofits inequitably.

Total discretionary spending is set at roughly $1.2 trillion for FY 2013, and while the budget adheres to the budgetary caps and limitations set in August by the Budget Control Act, it proposes increased funding for several education and infrastructure related initiatives, as well as roughly $350 million in short-term stimulus.

Spending provisions of particular interest to the nonprofit and philanthropic community include the following provisions:

  • Food and Nutrition Assistance
    -- Includes $7 billion ($23 million increase) in funding for the Special Supplemental Nutrition Program for Women, Infants and Children (WIC) for low-income and nutritionally at-risk pregnant and post-partum women, infants, and children up to age 5.
    -- Provides $1.7 billion to continue temporary Supplemental Nutrition Assistance Program (SNAP) benefits, a mandatory spending program.
  • Health and Human Services Programs
    -- Increases funding for the Low Income Heating Assistance Program to $3 billion ($450 million above 2012 request).
    -- Continues to fund transitional medical assistance, which provides continued Medicaid eligibility for low-income adults transitioning to work.
    -- Decreases funding for Community Services Block Grants by $300 million, to $350 million; proposes to distribute funds on a competitive basis to high-performing agencies that are most successful in meeting community needs.
  • Housing Assistance
    -- $34.8 billion for rental housing assistance to 4.7 million low-income Americans, including $8.7 billion for Project-Based Rental Assistance (a $640 million decrease from current levels) and $2.2 billion for Homeless Assistance (a $300 million increase over current levels)
  • Education
    -- Increases funding for Promise Neighborhoods to provide $100 million for “cradle to college” services to young people and families in troubled communities, an increase of $60 million over 2012 levels.
  • National Service Programs
    -- Increases funding for the Corporation for National and Community Service by 1 percent to $1.1 billion. Includes $50 million for a Social Innovation Fund to seed and scale up innovative programs that leverage private and foundation capital to meet major social challenges. Eliminates the Volunteer Generation Funding, which provides grants to states and nonprofit organizations to recruit and manage volunteers ($4 million reduction), and the Nonprofit Capacity Building Fund, which was intended to provide nonprofits with organizational development assistances, but is not currently funded.
  • National Endowment for the Arts
    -- Increases funding for the National Endowment for the Arts to $154 million, an $8 million increase over currently enacted levels.

Also of note, the president calls on Congress to replace $1.2 trillion in automatic spending cuts triggered by the failure of the Super Committee and set to begin in 2013, with alternative deficit reduction measures.

What’s Next?
Join us for a budget webinar next Friday, February 24 from 2:00-3:30 p.m., to take a deeper dive into the implications of the president’s budget proposal. We invite you to join budget and tax experts Nick Giordano of Washington Council Ernst and Young and Bob Greenstein of the Center on Budget and Policy Priorities, as well a panel of nonprofit policy practitioners, as we discuss key issues arising from the president’s budget. Registration is free for IS members.

Feel free to contact us with any questions.

The IS Policy Team

Independent Sector