Washington Snapshot - January 15, 2016

News from the Hill

POTUS Delivers his Final State of the Union Address

In his final State of the Union address, President Obama spoke of his hope and vision for the future of the nation. Rather than listing specific policy plans, President Obama emphasized themes that harken back to the early themes of his campaign of hope and change, and policy areas that his Administration will continue working on this last year in office. Among these are criminal justice reform, tax cuts for working families, protecting kids from gun violence, battling prescription drug and heroin abuse, equal pay, paid leave, and raising the minimum wage. As the President said, “These things still matter to hardworking families.”

But we, and as many journalists and pundits also noted, were struck by the President’s emphasis on the future. The President said, “I don’t want to just talk about next year. I want to focus on the next five years, the next 10 years, and beyond. I want to focus on our future. We live in a time of extraordinary change—change that’s reshaping the way we live, the way we work, our planet, our place in the world... It’s change that can broaden opportunity, or widen inequality. And whether we like it or not, the pace of this change will only accelerate.”

Further into the speech, he asked, “Will we respond to the changes of our time with fear, turning inward as a nation, turning against each other as a people? Or will we face the future with confidence in who we are, in what we stand for, in the incredible things that we can do together?”

So what answers might the philanthropy sector offer? The Council’s upcoming annual conference, The Future of Community, will provide a forum for foundations to come together to deliberate what these very questions mean in the broader context of what the future of all communities means. For philanthropy, it is about both people and place. We will explore facets of Identity, Purpose, and Place which will posit that the challenges we face also unite us, and that the future of community is dependent on our shared leadership. Find conference details on the Council’s website.

Brady Expresses Intent to Take on Tax Reform

The arduous process of tax reform has been on Congress’ “to-do” list for several years now, but to date has not had quite enough traction to materialize—but it’s getting very close.

Chairman of the House Ways and Means Committee Kevin Brady (R-TX-8) noted earlier this week that Congress is in “the last two miles of that marathon,” in reference to the first major overhaul of our tax code in nearly 30 years. Brady has also expressed his intent to push an international tax bill through his committee this year to build momentum toward a push for comprehensive reform in 2017.

Brady, along with Senate Finance Committee Chairman Orrin Hatch (R-UT), could begin working together to develop this international tax proposal as early as next week.

Reed to Introduce Bill on University Endowment Spending

As our readers are familiar, there has been a growing trend of skepticism around endowed philanthropy. In October of last year, the House Ways and Means Oversight Subcommittee held a hearing to examine the tax-exempt status of colleges and universities, and to probe whether institutions’ endowments might provide an antidote to rising costs of tuition. As an outcome of this hearing, the Congressional Research Service (CRS) published a report that considered four possible policy options for addressing the perceived issues pertaining to endowments:

1. An annual percentage payout, similar to private foundations;
2. A tax on university endowment earnings;
3. Limitations on the charitable deduction for individuals who donate to university endowment funds; and
4. Changing the tax treatment of debt-financed investments in strategies sometimes used by university endowments.

Now, Chair of the Oversight Committee Tom Reed (R-NY-23) is preparing to follow through with introducing a bill that would mandate more endowment funds to be spent on tuition relief. Though still in the process of being drafted, a recent article reports that this bill would mandate 25 percent of a school’s annual endowment income be spent on financial aid, or risk losing tax-exempt status. This serves to further support the case that policymakers are looking at endowed philanthropy with a critical eye—and that it is manifesting into real policy threats.

Happening in the States

Exclusive from our colleagues at the National Council of Nonprofits.

Property Tax Exemptions in Flux

State legislatures and courts are struggling to apply long-standing property tax exemptions to today’s nonprofit operations. The New Jersey Legislature approved a bill earlier this week to create a mandatory payment framework for tax-exempt nonprofit hospitals. The legislation reaffirms the property tax exemption for nonprofit hospitals, an issue questioned in a recent court ruling, while simultaneously mandating payment of fees, essentially a statutory payment in lieu of taxes (PILOT) scheme. See the Center for Non-Profits analysis for more details. It is unclear whether Governor Christie will sign the bill.

Last week, an Illinois appeals court struck down a 2012 statute that had sought to clarify how nonprofit hospitals in that state could demonstrate eligibility for property tax exemption. Responding to a state Supreme Court ruling denying exemption to a hospital that could not demonstrate its community benefit, the Legislature had created a reporting system that enabled nonprofit hospitals to show they spent at least as much on community benefits, based on a broad list of qualifying expenditures, as the value of the tax exemption. The recent court decision held that the Legislature improperly expanded the definition of what counts as “primary use” of the property for charitable purposes under the state constitution.

The Illinois ruling is reminiscent of a 2012 Pennsylvania case rejecting the property tax exemption of a faith-based camp that has led to a showdown in Pennsylvania over who decides the scope of the exemption, the courts interpreting the state constitution or the legislature. A constitutional amendment is pending in Pennsylvania that seeks to settle the matter in favor of the Legislature.

All is not defensive in the courts on the tax exemption front. Earlier this month, the Minnesota Council of Nonprofits joined in support of litigation challenging a “street right of way maintenance assessment” that appears to be an effort by local governments to tax organizations that are exempt.

The case, First Baptist Church v. City of St. Paul, presents the fundamental question of should “organizations that are exempt from the payment of real property taxes be required to pay local taxes disguised as regulatory service fees and used to finance general government services properly paid through ad valorem taxes?” While rooted in the law of one state, the results of the case, as with the recent decisions in New Jersey and Illinois, could shape the debate on property tax exemption for years to come.