[P]roposed changes to Vermont’s income tax code have nonprofit leaders concerned about the future of the large donations on which they rely.
In the income tax bill, H.911, passed by the Legislature late Saturday evening, Vermonters would no longer be able to deduct charitable contributions on their state income taxes. Instead, donors would get a 5 percent tax credit on donations up to a total of $20,000.
This tax credit is one piece of the Legislature’s effort to decouple Vermont’s income tax code from federal standards to avoid an inadvertent $30 million hike brought on by the federal Tax Cuts and Jobs Act.
Rep. Janet Ancel, D-Calais, chair of the House Ways and Means Committee, said in an interview that the cap is a “tradeoff” in order to reduce taxes for low- and middle-income families through measures like reducing taxes on Social Security benefits and reinstating the personal exemption at $4,150.
The cap on donations eligible for a tax credit is what’s worrying Vermont nonprofit heads, who claim it could discourage large donors from giving above the $20,000 threshold.
“Charitable gift caps effectively eliminate the incentive to give additional dollars above the cap,” wrote 32 nonprofit leaders in a letter to the governor and the Legislature last month. “This is important because many charities receive 80 percent of their dollars from 20 percent of their donors.”
Elise Annes, vice president for community relations with the Vermont Land Trust, said that while the new tax credit available to all donors could “democratize giving,” relying heavily on a large donor base made up of small contributors increases costs for nonprofits.
Vermont philanthropist Susan Ritz of Montpelier said major contributors are those to whom nonprofits turn when taking on major projects that provide public benefits, such as a new hospital wing.
“I think in this state there’s a certain number of people in every community who are known to be the people who give money, and it’s not a big pool,” said Ritz, who donates to a host of environmental, women’s rights and arts groups.
Ritz said many donors make end-of-year decisions about how much to give based largely on tax write-offs.
“If I’m not going to see any tax incentive, I might consider cutting my donations in half,” said Ritz of potential contributors.
Christine Zachai of Montpelier, who runs the consulting firm Forward Philanthropy, said a “missing piece” from the discussion about the tax credit cap is how it will impact donations and bargain sales of conserved land or easements.
A major incentive for people to sell land below market value to land trusts is that they receive a charitable deduction based on the full value of the land — an incentive eliminated by the new tax credit, according to Zachai.
Zachai added that every year, the governor and Legislature speak about the need to address social crises ranging from opioid addiction to the lack of affordable housing. Most of that work is undertaken by Vermont nonprofits, said Zachai.
“It is patently unfair for the Legislature to handicap nonprofits as they scramble to raise funding to carry out the state’s priorities,” she wrote in an email.
John Killacky, director of Burlington’s Flynn Center for the Performing Arts, said in an interview that he feels Vermont should hold off on changing how charitable donations are taxed at the state level until nonprofits have had time to adjust to the impact of federal tax changes.
In its version of the tax bill, the Senate did not have a cap on donations eligible for charitable giving. Instead, it chose not to collapse the top two tax brackets, as was done in the version of the bill eventually passed by the Legislature. The House version originally had a $10,000 cap on tax credits for charitable donations — the $20,000 limit was reached as a compromise in conference.
“The Senate chose to err on the conservative side because we wanted to do everything we could to protect the nonprofits, especially since some of them provide essential state services,” said Sen. Ann Cummings, D-Washington, chair of the Senate Finance Committee.
Cummings added that the House version provided middle-income Vermonters with more tax breaks, a feature retained in the bill passed by the Legislature.
Ancel, the House Ways and Means chair, said the charitable deduction at the federal level provides a greater incentive to donate than Vermont’s tax incentives, before or after the proposed changes. She added that states with no income taxes, and consequently no state incentives, still see people make large donations to nonprofits.
“I can understand why people are feeling anxious about (the changes) and we’re going to keep an eye on it,” Ancel said. “If we need to make adjustments in the future, we’ll make them,” said Ancel.
