May 17, 2013
ACR News 5.17.13—Scandals Freeze Legislation on Capitol Hill
Most of official Washington is denouncing the recent revelation that the Tax-Exempt Division of the Internal Revenue Service (IRS) inappropriately flagged conservative political groups for additional scrutiny of their applications for tax-exempt status in the midst of the 2012 election. The optics are awful, even if intentions weren’t. The revelation has created a firestorm here in DC and the President, along with IRS officials, is taking a lot of heat for his Internal Revenue Service.
Here is what we know so far: in the summer of 2010 a group of IRS officials based in Cincinnati, OH developed criteria for identifying overly politicized 501(c)(4) applicants, which included words like “tea party” and “patriot.” In July 2011, the director of the IRS told these officials to stop and use more politically neutral criteria. In January 2012, that same group of IRS officials changed the test back without approval because, according to an internal investigative report, “they believed the July 2011 criteria were too broad.” Three months later, a new IRS director demanded the test be revised again.
While it appears that the improper conduct eventually stopped, as a consequence of these actions, many organizations waited more than 13 months for a decision on their tax-exempt status. In some cases these groups were also asked for additional information, including Facebook posts and what books their members were reading. Overall, nearly 75 conservative groups were singled out for extra review.
The Acting IRS Commissioner, Steve Miller, tendered his resignation Wednesday night.
So far, at least two House Committees (including Ways and Means) and the Senate Finance Committee will hold hearings, and Senate Majority Leader Harry Reid (D-NV) promised that “the Senate will quickly take appropriate action.”
If one scandal weren’t enough, the President’s Justice Department is taking heat for a press scandal. The Associated Press (AP) reported that the Department of Justice (DOJ) seized telephone records of AP journalists over a two month span. The reason? Officials familiar with the case said the seizure was part of an investigation of a leak involving a May 2012 AP story about a counter-terrorism operation in Yemen, in which the CIA foiled a plot to detonate a bomb on a U.S.-bound airplane. Attorney General Eric Holder said, “this was a very serious leak. A very, very serious leak. It put the American people at risk, and that is not hyperbole. It put the American people at risk.”
The investigation was carried out by the FBI under the supervision of the Deputy Attorney General James Cole, and Holder recused himself from the DOJ investigation to prevent any conflict of interest. Holder was on Capitol Hill Wednesday for a House Judiciary Committee hearing on this issue.
What does this mean for President Obama’s second term? To give it some perspective, currently one third of the Committees in the House of Representatives are investigating the Obama administration in some capacity. In the end, these issues will be resolved but at some cost to the President’s political capital.
So how could these scandals and natural distractions affect tax reform? Mississippi GOP Sen. Roger Wicker, one of the targets of the White House’s charm offensive, said the controversies dominating conversation in Washington this week could hurt efforts to reach bipartisan deals on the budget and tax reform.
“I can’t imagine that this IRS scandal and the controversy surrounding the overreach and intimidation by the IRS will do anything but pour cold water on the president’s attempt to raise taxes as part of a grand bargain,” Wicker said on MSNBC. “So yes, it will hurt the president in that respect.”
While tax reform appears ripe for bipartisan cooperation, Wicker said the IRS scandal “very well might” set that effort back as well.
As you know, on May 6th the Joint Committee on Taxation (JCT) released its summary of tax reform options as part of the House Ways and Means Committee’s Tax Reform Working Group process. In a statement, Chairman Camp said “Over the past two-plus months the Joint Committee on Taxation has worked tirelessly alongside Ways and Means Committee Members of the 11 Tax Reform Working Groups. The release of today’s report reflects the hard work of Members and staff. This document provides an important and comprehensive overview of the tax code, an overview of some of the most commonly referenced previous tax reform proposals and summarizes the views of more than 1,300 submissions offered to the Ways and Means Committee by key stakeholders. The Committee will dig into its details over the coming weeks.”
The report listed the findings of the working groups and public comments received during the open comment period – reviewing many options but offering no substantive detail on specific provisions. The document provided a thorough overview of present law, then summarized previous tax reform proposals from the National Commission on Fiscal Responsibility in 2010 (aka Simpson-Bowles), the 2005 President’s Advisory Panel on Federal Tax Reform, and the recent White House economic recovery advisory board. It also summarized suggestions from think tanks like the Bipartisan Policy Center and the Center for American Progress, as well as congressional proposals, including the Wyden-Coats tax reform plan of 2011. Finally, the report outlined the suggestions and comments received by the working groups through roundtable discussions and the web portal.
Several options addressing charitable giving and the tax-exempt sector were included in the report. The report noted that “several comments urge Congress to retain the charitable deduction in its present form. Other comments argue that the value of present-law incentives for charitable deductions should not be reduced, or that Congress should proceed with caution when considering changes to the deduction to ensure that changes do not cause a reduction in the overall level of charitable giving. Other comments more specifically oppose recent proposals to limit the deductibility of charitable contributions.” It’s important to note that the document also outlined feedback supporting changes to the charitable deduction, including the imposition of a 28% cap and allowing a non-itemizer deduction. There was no mention of eliminating the charitable deduction outright. This section also noted feedback calling for elimination of the Pease rule and carving out charitable deductions from Pease. Interestingly, JCT also mentioned that “other commentary urges Congress to resist calls to treat certain section 501(c)(3) charitable organizations, such as cultural organizations, differently from organizations that serve basic human needs of food and shelter.” The second section included called for streamlining the private foundation excise tax on investment income to a flat one-percent.
ACR submitted a comment letter to the Ways and Means Committee on three topics: preserving the charitable deduction, streamlining the private foundation excise tax, and excluding charitable contributions from the Pease provision. In the letter, ACR reiterated our position that “As Congress moves towards tax reform, [ACR is] hopeful Congress will strongly consider policies that will lead to more giving while carefully guarding against policies that could unintentionally thwart giving.”
In sum, the report is an exhaustive compendium of relevant options for tax reform. The purpose of the small working groups was to gain buy-in from Members on both sides of the aisle, and indeed this exercise has generated some genuine bipartisan goodwill. At the end of the day, what Chairman Camp is really shooting for is getting something out of his committee that is bipartisan – which in the current political climate means only a handful (if that) of Democratic supporters.
Both tax-writing committees are continuing to move the ball down the field with respect to tax reform. First off, the two lawmakers leading this effort, Ways and Means Committee Chairman Dave Camp (R-MI) and Senate Finance Committee Chairman Baucus (D-MT), recently launched a web portal to give taxpayers the opportunity to tell the tax-writers what a modern-day tax code should include (or not include). The Chairmen, “Max and Dave” as they are referring to themselves in this new endeavor, released a statement saying “we are dedicated to writing bills in an open and transparent fashion. No cutting deals behind closed doors. You get a say, employers get a say, and our colleagues — your representatives and senators — will get a say. There are skeptics who question the prospects for bipartisan tax reform. We know we face some fierce headwinds. People from across the spectrum are trying to turn tax reform into a political weapon, which could end up killing any chance at success.” This public outreach effort signals increased emphasis on undertaking tax reform in both chambers, and represents what the Chairmen call a “clean slate approach” – the whole tax code has been scrubbed and they are now adding provisions back in on a piecemeal basis.
Now that the Joint Committee on Taxation’s report has been released, it is clear that the Ways and Means Committee is pivoting from information-gathering to more substantive analysis. We understand that Chairman Camp is continuing to push for a bill to be released before the August recess, which could be tied to an increase in the federal government’s debt limit. The government is due to hit the latest debt ceiling limit on May 18th. After that date, the Treasury Department can use “extraordinary measures” to extend that date until September or even October. A recent report also indicated that federal tax revenue is up due to higher rates and an improving economy, and spending is down due to the sequester, so the date could be even later. This means that the debt ceiling debate will bleed into the fall, and it is likely that Congress will adjourn for August recess without reaching a deal.
On the Senate side, the Finance Committee is moving at a slower pace and is still in the fact-finding stages. The weekly Members-only briefings continue, most recently discussing tax provisions related to community development. Given the current pace, we are expecting the meeting regarding the charitable deduction and the sector as a whole to take place in early to mid-June. As always, we will keep you updated with their process.
ACR Blog & Video Roundup
For regular updates from our blog, follow us @ACReform on Twitter.
- Charitable Deduction: Charities Concerned about Congress’ Tax Reform Proposals, Accounting Today
- Charitable Deduction: Tax Reform Working Groups Report on Charitable Deduction and Exempt Organization Issues, Nonprofit Blog
- Charitable Deduction: Lawmakers Go Online for Grassroots Push on Tax Reform, Chicago Tribune
- State Issues: Moran’s Memo: Maintaining the Tradition of Charitable Giving, The Hays Post, Kansas
- State Issues: Minnesota Nonprofits Fight Change in Tax Deduction, The Chronicle of Philanthropy
- (OPINION) Tax Benefits Increase Level of Charitable Giving, (Bob Morris and Tod Hyche)
- (OPINION) The IRS Scandal and the Real Nonprofit Lobbying We Should Worry About (Howard Husock, Forbes)
Visit Charitable Deduction Central for news, opinion, background and updates on efforts to protect the charitable deduction.
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