David Heinen, Vice President for Public Policy and Advocacy, North Carolina Center for Nonprofits
Updated October 16, 2019
Late October is rapidly approaching, and several seasonal occurences could bring a smile to your face:
- North Carolina's late summer weather is (finally) beginning to be interrupted by intermittent cooler temperpatures;
- Vendors at the state fair are (finally) getting ready to unveil the latest advances in creative deep-fried foods;
- The Washington Nationals will (finally) get a chance to play in the World Series; and
- North Carolina's part-time state legislature may (finally) adjourn for the year after being in session for nearly 10 months!
You read that right! The NC General Assembly may indeed conclude its 2019 session by the end of this month. With a possible (temporary) end of the state legislating season in sight, the Center is offering this update on the status of legislative proposals that would affect the work of North Carolina nonprofits. We are also including our predictions about the prospects for each proposal being passed this year or in 2020.
Major Policy Issues Affecting Nonprofits
The main job of the NC General Assembly is to pass a state budget every two years to set the framework for funding a wide variety of state programs, including public education at all levels, health care and human services, justice and public safety programs, and natural and cultural resources. The House and Senate agreed on a budget (H.B. 966) in June, but it was promptly vetoed by Governor Roy Cooper. Legislators can override a Governor's veto if 60% of the voting members of each chamber vote "yes" on the override. This year, legislative Republicans don't have large enough majorities in either chamber to override the veto by party-line votes, so Governor Cooper's budget veto stood in place for two-and-a-half months this summer. On the morning of September 11, however, the House voted to override the veto when most Democrats were absent from the floor, allowing the veto override to proceed in a party-line vote. The Senate still hasn't voted on a veto override, so three-and-a-half months into the state's fiscal year, there is still no state budget in place. This means that state programs are currently funded at "recurring" levels from last year's state budget, which is far from ideal since these levels don't account for population growth, changes to state agencies and funded programs, recent natural disasters, and a variety of other factors.
Many parts of the state budget affect the work of nonprofits. The Center has prepared a summary chart of key nonprofit provisions in the final legislative version of the state budget. Among (many) other things, the budget includes earmarked special appropriations totaling more than $117 million to 207 nonprofits in key legislative districts. The Center has compiled a list of these earmarks and has posted an analysis explaining why this possible new state funding is mixed news for the nonprofit sector.
To help facilitate the continued operation of many state functions, the House and Senate have passed a variety of "mini-budget" bills over the past two months. These bills enact a variety of budget provisions that have broad bipartisan support. These "mini-budget" bills have included disaster relief support, pay raises for some state employees, expansion of a grant program to increase access to broadband in rural parts of the state, and funding to implement the Raise the Age legislation – for which a broad coalition of nonprofits successfully advocated last year – that removes many 16- and 17-year olds who are charged with crimes in North Carolina from the adult juvenile justice system. Except for a bill providing funding for Medicaid transformation - the state's upcoming transition of Medicaid to a managed care network - Governor Cooper has supported all of these "mini-budget" bills.
Prediction: To quote Yoda: "Difficult to see. Always in motion, the future is!" As of this writing, the most likely scenario is that legislators will pass a few more "mini-budget" bills in October and then return for a special session in early 2020 for the Senate to override the Governor's veto. An override is more likely then, since it will be past the deadline for legislators to file for re-election, so partisan politics should be less of a factor.
Closing the health insurance coverage gap
Currently, nearly half a million North Carolinians have too high of incomes to qualify for Medicaid but don't have enough money to purchase their own private health insurance or to receive federal support to help pay for health coverage. With ever-rising health care costs, these North Carolinians in the coverage gap are turning more and more to nonprofits to meet many of their basic needs, such as health care, food, housing, and child care. This problem exists because North Carolina remains one of 14 states that has declined the Affordable Care Act's option to expand Medicaid eligibility to many adults in this coverage gap. Governor Cooper has made Medicaid expansion one of his top priorities this year, and its absence from the state budget was one of the main reasons for his veto.
There is bipartisan support in the House for the NC Health Care for Working Families Act (H.B. 655), which would create a new health care option for adults in this coverage gap. To quality, most North Carolinians in the coverage gap would need to meet a work requirement, pay an annual premium of 2% of their income, and receive basic preventative care screenings and wellness activities. Senate leaders remain firmly opposed to any form of Medicaid expansion, but they have suggested that the General Assembly could hold a special session to address proposals to increase access to health care.
The Center supports the NC Health Care for Working Families Act, although it is not a perfect bill. It is possible that the work requirement could create a unique challenge for some nonprofits if it allows beneficiaries to volunteer with a nonprofit instead of working. Including this type of "community engagement" component in a work mandate for governmental benefits is problematic for many nonprofits. This type of "mandatory volunteerism" can put a strain on some nonprofits' capacity to handle volunteers, can create new financial and administrative burdens (and potential liability) for nonprofit organizations, and can create a pool of volunteers who may not be fully committed to nonprofits' missions. If the bill becomes law, the Center will work with the NC Department of Health and Human Services to ensure that it is administered in a way that minimizes burdens on nonprofits.
Prediction: The House will narrowly approve its version of Medicaid expansion in late October, but the Senate will not schedule a commitee hearing on the bill this year. The ultimate fate of the bill will be largely dependent on continued negotiations on the state budget override and on how politicians anticipate its passage would affect their chances of re-election in November 2020. As with the state budget, Medicaid expansion stands a better chance of passing in early 2020 after the filing deadline for next year's election.
Legislative redistricting was a hot topic at the General Assembly in early September, when the House and Senate approved new state legislative districts for the 2020 election. This redistricting process came in response to a recent court ruling requiring the General Assembly to redraw many state House and Senate districts because they were determined to be illegally gerrymandered for partisan political gain. The latest redistricting plans were developed without using partisan data - but with the help of a lottery machine, which used ping pong balls to select maps at random from among several options developed by an expert witness in the gerrymandering trial. The court is currently reviewing the final redistricting plans for the NC House of Representatives (H.B. 1020) and the NC Senate (S.692). If the court determines that these new districts violate the terms of its court order, it could still decide to redraw the districts on its own later this fall.
Now that legislators have redrawn their district maps for the 2020 election, it is possible that they will consider one or more of six legislative proposals for an independent, nonpartisan redistricting process later this year or in early 2020. The Center has long supported an independent, nonpartisan redistricting process. Nonpartisan redistricting would strengthen nonprofits’ voices since it would create many more competitive elections and would make politicians more responsive to their constituents (including constituent nonprofits serving their districts) rather than to their partisan political donors. Any of these legislative proposals would be a significant improvement over the current system of gerrymandering. While legislators in the majority party are resistant to independent redistricting (which was true when Democrats were in the majority and remains true with Republicans in the majority), it is encouraging that more than half of the members of the House have publicly signed on to support these proposals to end gerrymandering. The Center encourages every nonprofit to make its voice heard on this important issue.
Prediction: There remains a glimmer of hope that legislators will approve a nonpartisan redistricting process next year, either in a special session or during the 2020 short session. Ironically, the prospects for nonpartisan redistricting rest primarily on the partisan political outlook. Under current law, whichever party has a majority in the General Assembly after the 2020 election will get to gerrymander North Carolina's congressional and state legislative districts for the next decade. As the 2020 elction approaches, if legislators from both parties have sufficient uncertainty about their prospects for winning legislative majorities, it's possible that they will agree that a nonpartisan redistricting process is far more palatable than the prospect of having districts gerrymandered by the other party.
Tax Policy Affecting Nonprofits
Sales tax exemption
A proposal in the NC Senate (S.346) would establish a true point-of-sale exemption from sales tax for most 501(c)(3) nonprofits. This would replace North Carolina's current system where nonprofits pay sales tax on their purchases and have the privilege of seeking refunds from the NC Department of Revenue twice a year. The Center strongly supports this proposal, which would save time and money for thousands of nonprofits across North Carolina, helping devote more of their limited financial resources to providing programs and services to North Carolina's communities. We are appreciative of Senator Don Davis (D-Pitt) for taking the lead in this effort to enhance nonprofit tax exemption and to other legislators from both parties who have expressed support for this idea.
Prediction: This bill won't get a hearing this year or Ithe 2020 short session, but this excellent idea won't go away. If enough nonprofits reach out to their state legislators early in 2021, it's quite possible it could be reintroduced and get enough support to be given more serious consideration.
Incentives for charitable giving
Individual donors are an important source of revenue for many charitable nonprofits. Traditionally, tax considerations have helped donors decide how much to contribute to nonprofits, as about a third of North Carolinians received tax deductions for their charitable contributions. The Tax Cuts and Jobs Act, which was passed in late 2017 and took effect last year, changed that calculus for many donors. With a much higher standard deduction, far fewer North Carolinians (somewhere between 5% and 10% of all taxpyaers) are using the charitable deduction. Early data suggests that donors gave a bit less to nonprofits as the main tax incentive for charitable giving went away in 2018 - and individual giving is expected to drop even more this year, once many donors more fully understand that their chartiable contributions no longer reduce their tax burden. To offset this trend, the Center and other nonprofits have advocated for policymakers to create new federal and/or state tax incentives for charitable giving, particularly for the vast majority of North Carolinians who no longer use the charitable deduction on their federal taxes. The General Assembly is considering a few possible new tax policies that would incentivize North Carolinians to give more generously to support the work of charitable nonprofits.
A provision in the state budget would extend the IRA charitable rollover – a popular federal tax incentive for charitable giving – to state taxes. Individuals aged 70 ½ and older may make tax-free (for federal tax purposes) distributions to nonprofits from their individual retirement accounts (IRAs). However, under current law, North Carolina donors who use the IRA charitable rollover must pay state taxes on these charitable contributions. The budget provision would end this state tax on donations to nonprofits through IRAs, simplifying the process for donors and allowing them to contribute more fully to nonprofits from their IRAs. This change is particularly important now that the IRA charitable rollover has become a more attractive giving option for some donors after the federal Tax Cuts and Jobs Act was passed in December 2017. The IRA charitable rollover provision has bipartisan support in both the House and the Senate. In early October, the Senate added it to another bill (H.B. 399) that passed quickly, unanimously, and without controversy, so it could be enacted even if the state budget doesn't become law.
Prediction: The House will pass H.B. 399 this month, and North Carolina nonprofits will start to see larger contributions from IRAs in the near future.
In early October, the NC House of Representatives unanimously approved a bill (H.B. 1008) that would create a tax credit for individuals or business that donate property to conservation nonprofits, the state, or a local government if that property is useful to buffer military bases in North Carolina. Individuals and businesses donating qualifying property would have the option of receiving a 25% state tax credit instead of counting the value of the donation as a tax-deductible charitable contribution on state taxes. While this new tax credit would be very limited, it would set an important precedent in creating an incentive for charitable giving that could be used by individuals who do not itemize their taxes. This is significant, since the vast majority of North Carolinians now use the standard deduction (meaning they do not receive tax benefits for their charitable contributions) because of the structural changes of the 2017 Tax Cuts and Jobs Act.
Prediction: The Senate will take up this bill in the 2020 short session.
The Center continues to advocate for state legislators to consider adding a tax credit for charitable contributions by North Carolinians who use the standard deduction. As noted above, the recent federal tax law changes mean that very few North Carolinians have a tax incentive to contribute to the work of nonprofits. Establishing a state tax credit for charitable contributions by non-itemizers could help offset the anticipated drop in individual giving in coming years. Unfortunately, the one proposal to address this is flawed. A House bill (H.B. 894) would create a new “universal charitable donation credit” on state taxes. The credit, which would be available to any taxpayer who makes cash contributions to charitable nonprofits, would be capped at $200 for single taxpayers and $200 for married couples. Realistically, this proposal would provide very little incentive for most North Carolinians to give generously to nonprofits. As a dollar-for-dollar tax credit with a very low cap, this proposal would likely give most North Carolinians a tax break for their first $100 or $200 in charitable contributions each year. This is unlikely to translate to a significant increase in overall charitable giving, but could cost the state considerable tax revenue.
Prediction: Legislators won't approve a new tax deduction or tax credit for charitable contributions by non-itemizers this year or in 2020, but more serious proposals will be considered in 2021 once nonprofits have better data about the impact of the 2017 tax law changes on private giving.
Sales tax on nonprofit events
Currently, state law is ambiguous on whether nonprofits need to charge sales tax on fees or ticket prices to fundraising events that include entertainment. For the past four years, the Center has advocated for legislators to exempt nonprofit fundraising events from sales tax on admission fees to entertainment.While no legislation has been introduced to fix this problem, legislators appear to be receptive to nonprofits' concerns.
Prediction: A legislative committee will study this issue this winter and recommend that the General Assembly approve a sales tax exemption for nonprofit fundraising events.
Proposals Affecting Nonprofits' Operations
Nonprofit annual reports
Unlike in other states, North Carolina nonprofit corporations do not file annual reports with the state. This can harm the public's trust in nonprofits, since tens of thousands of defunct nonprofits remain incorported in North Carolina, creating the potential for misuse of a non-operational nonprofit in a way that would harm the public's trust in the nonprofit sector. This spring, the Senate unanimously approved a bill (S.362) that would fix this problem by creating a new annual reporting requirement for nonprofits that are incorporated in North Carolina. The bill, introduced by Senator Andy Wells (R-Catawba), would ensure that these annual reports are simple, online forms, that there would be no new fees for nonprofits, and that organizations that have charitable solicitation licenses (and therefore already provide the same information to the Secretary of State) would be exempt. If it passes, the annual reporting requirement would take effect in 2021. The Center supports this bill and will continue to work with the Secretary of State to ensure that nonprofits - particularly small organizations - are aware of the new annual report requirements and that the reports are easy for nonprofits to file and do not create duplicative reporting requirements. While the bill passed the Senate without controversy, it remains stuck in the House Rules Committee (where bills typically sit until House leadership assigns them to another substantive committee for consideration). The fate of the state budget could impact the passage of this bill, since the budget provides the Secretary of State the necessary additional funding to implement it.
Prediction: The House will pass the legislation during next year's short session, but it will push back the implementation date to January 1, 2022 to give nonprofits and the Secretary of State adequate time to prepare for the change.
Under current law, small nonprofits with less than $25,000 in annual contributions are exempt from annual charitable solicitation licensing (and the related expenses) if they do not compensate staff or contractors for fundraising. The House has unanimously approved a bill (H.B. 732) that would raise the threshold for exemption to $50,000 to be consistent with the filing threshold for the simple Form 990-N annual report with the Internal Revenue Service. The Center strongly supports this proposal, and we are appreciative of Representative Brandon Lofton (D-Mecklenburg) and Senator Mike Woodard (D-Durham), who introduced an identical bill (S.647), for taking the lead on this issue. While the bill passed the House without controversy, it remains stuck in the Senate Rules Committee (where bills typically sit until Senate leadership assigns them to another substantive committee for consideration).
Prediction: The Senate will unanimously pass this bill during next year's short session.
The bills modernizing charitable solicitation exemption would also make two good changes to modernize the NC Nonprofit Corporation Act. Specifically, they would:
- Modernize state laws for mergers of nonprofits to expressly allow nonprofit corporations to merge with unincorporated nonprofit associations and with single-member limited liability companies whose sole members are 501(c)(3) nonprofits; and
- Exempt a charitable nonprofit that is dissolving and transferring its assets to another charitable or religious organization from having the NC Attorney General review the transactions, as long as the asset transfer is done in accordance with a properly authorized plan of dissolution.
The Center has worked with several attorneys who represent nonprofits to help legislators develop these proposed changes, and we strongly support this bill.
Prediction: The Senate will unanimously pass this bill during next year's short session.
The House and Senate are negotiating the final version of a bill (S.683) that would make several changes to election laws to help prevent absentee ballot fraud and to increase access to early voting. In September, the House made two important changes to the bill in response to concerns addressed by nonprofits:
- Originally, the bill would have prohibited anyone (or any organization) other than a voter, the voter’s near relative, or the voter’s verifiable legal guardian from helping submit a request for an absentee ballot. This change was designed to prevent the problematic practice of absentee ballot harvesting. Several nonprofits expressed concerns to the Center that this provision could prevent them from providing needed absentee ballot assistance to the people they serve, including seniors and people with disabilities. The bill was amended to allow others (potentially including nonprofits) to assist voters with absentee ballot requests if the voters need this assistance due to blindness, disability, or inability to read or write.
- The bill was also revised to provide that residential facilities for seniors and individuals with disabilities, many of which are nonprofits, could continue to use multipartisan assistance teams to provide absentee ballot assistance to their residents.
The House version of the bill also would permanently restore the last Saturday of the early voting period. The General Assembly has already passed legislation to restore the last Saturday of early voting for the 2020 election. This would be a welcome change for many nonprofits, since the final Saturday has typically had high voter turnout, and many nonprofits have had successful nonpartisan get-out-the-vote campaigns on this Saturday.
Prediction: Because absentee ballot reform is a priority for many legislators, it's likely this bill will pass before the long session ends later this month. The Center continues to advocate for legislators to preserve the changes in the House version that help nonprofits and the communities they serve.
A Senate bill (S.387) would require the NC Department of Health and Human Services (DHHS) to add work and “community engagement” requirements for most Medicaid recipients in North Carolina. Typically, these types of “community engagement” requirements obligate individuals to "volunteer" for a certain number of hours per week or per month to be eligible to receive governmental benefits. Including this type of "community engagement" component in a work mandate for governmental benefits is problematic for many nonprofits. The Center opposes this bill, since this type of "mandatory volunteerism" can put a strain on some nonprofits' capacity to handle volunteers, can create new financial and administrative burdens (and potential liability) for nonprofit organizations, and can create a pool of volunteers who may not be fully committed to nonprofits' missions.
Prediction: This bill won't be heard in 2019, but it could be considered during next year's short session, either on its own or as a provision in the state budget or another bill.
Reducing administrative red tape
A provision in the state budget would require DHHS to create a workgroup to address duplicative administrative requirements for mental health, substance use disorder, and intellectual/developmental disability providers (most of which are nonprofits). Like the rest of the budget, the fate of this provision rests in the hands of the NC Senate. If this provision becomes law, DHHS would need to report its findings and recommendations for fixing these administrative issues to the General Assembly by March 31, 2020. Nonprofits that provide public services through state grants and contracts have consistently reported that a variety of duplicative administrative requirements divert much of their staff and financial resources away from providing essential services. The House also passed this as a separate bill (H.B. 471) this spring, so it's still possible that it could be enacted later this year or in the 2020 short session (probably with a later effective date) if the Governor's veto of the state budget remains in place. The Center strongly supports this bill, which could be a step in helping many nonprofits operate even more efficiently and effectively.
Prediction: If the budget veto isn't ultimately overridden, this provision will become law next year, either as a part of another budget bill or in separate legislation.