An April Update on State Legislation Affecting Nonprofits

David Heinen, Vice President for Public Policy and Advocacy

(Updated: April 25, 2019)

By our count, at least 69 of the 1,886 bills that have been filed thus far in the NC House of Representatives and NC Senate this year (as of Thursday, April 25) affect the nonprofit sector in some way. Many other bills would affect individual nonprofit organizations and the communities they serve. To help you track proposals that might affect the work of your nonprofit, the Center is providing this summary of some of the most significant nonprofit legislation of the 2019 session.

 

Tax policy issues 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. Even though it is unlikely to pass this year, it is great news that legislators are recognizing the importance of nonprofit tax exemption for North Carolina's communities.

Incentives for charitable giving

Both the House and the Senate have included a provision in their main tax proposals (H.B. 676 and S.622) that 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 legislation introduced this week 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. Representative Julia Howard (R-Davie) has taken the lead in fixing this quirk in North Carolina's tax law. There is a good chance that it will pass this year, since both the House and Senate have included it in their tax proposals for this year.

Meanwhile, 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. With the recent federal tax law changes, 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.

Sales tax on nonprofit events

For the past four years, the Center has advocated for legislators to exempt nonprofit fundraising events from sales tax on admission fees to entertainment. Currently, the law is ambiguous on whether nonprofits need to charge sales tax on fees or ticket prices to fundraising events that include entertainment. While legislators are unlikely to consider this amendment in 2019, we are encouraged that leaders in both the House and Senate now understand this issue and may be willing to fix it in 2020. In the meantime, tax law changes being considered by the Senate (S.523) and House of Representatives (H.B. 600) would clarify that nonprofits do not need to charge sales tax for tuition or registration fees for educational events, even if there is some entertainment provided at these events. This clarifying change would be a good first step to creating a broader nonprofit exemption.

 

Proposals affecting nonprofit operations and fundraising

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. A Senate bill (S.362) 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. 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. Similar legislation passed the Senate and House nearly unanimously in 2017, but fell one vote short of being sent to the Governor's desk. We are optimistic that the annual reporting legislation will pass this year.

Charitable solicitation

Under current law, small nonprofits with less than $25,000 in annual contributions are exempt from annaul charitable solicitation licensing (and the related expenses) if they do not compensate staff or contractors for fundraising. Legislation introduced in the House (H.B. 732) and Senate (S.647) would reaise 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 appreciiative of Representative Brandon Lofton (D-Mecklenburg) and Senator Mike Woodard (D-Durham) for taking the lead on this issue. We are optimistic that the House will take up this proposal in the coming weeks.

Nonprofit mergers

The bills modernizing charitable solicitation exemption would also make two good changes to modernize the NC Nonprofit Corporation Act. Specifically, they would:

  1. 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
  2. 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.

Nonprofit game nights

Many nonprofits across North Carolina have organized casino nights or "game nights" as fundraising events. Under current law, these events are illegal in North Carolina, although enforcement varies greatly in various parts of the state. Bills in both the House (H.B. 130) and Senate (S.66) would make game night fundraisers legal and would create a structure for the state to regulate these events. Both the House and the Senate have passed H.B. 130 (which had broad bipartisan support in both chambers). The House and Senate will now need to agree on a final version of the bill to send to the Governor. If it becomes law, it would take effect on May 1, and nonprofits would be able to conduce up to four game nights per year as fundraising events. The Center is appreciative that the bills' sponsors, Representative Jamie Boles (R-Moore) and Senator Rick Gunn (R-Alamance) have listented to feedback from nonprofits in improving these proposals.

Mandatory volunteerism

The Senate could consider a bill (S.387) that 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. It is unclear how serious of consideration legislators will give to this proposal.

 

Proposals affecting nonprofits that provide public services through state grants and contracts

Reducing administrative red tape

The House has unanimously approved a bill (H.B. 471) that 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). If the bill passes, 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. A House committee unanimously approved the bill, and there is a good chance it could ultimately become law. The Center strongly supports this bill, which could be a step in helping many nonprofits operate even more efficiently and effectively.

State funding for nonprofits

Dozens of bills have been introduced to appropriate state funds for grants to specific nonprofits. Of particular note, two of the proposals would establish new funding streams for a type of nonprofit rather than just funding one individual organization:

  1. One bill (H.B. 556) would provide $1 million in new state funding for North Carolina’s six food banks; and
  2. Another bill (H.B. 549 and S.456) would create a $2.5 million state matching grant for nonprofits providing affordable housing services.

It is unlikely that legislators will vote on any of these bills to fund nonprofits, but some of the proposals could be incorporated into the state budget for FY2019-21 being developed by legislators this spring. The House is expected to release its version of the state budget on April 30 and pass it in early May, and the Senate will consider its version soon after the House passes its budget proposal. Governor Roy Cooper will likely play a larger role in the budget negotiation process this summer, since it is unlikely that legislators could approve a budget with a supermajority vote strong enough to become law without his signature.

In the past two years, state legislators have included a variety of earmarks to nonprofits in key legislative districts in their final version of the state budget for 2017-18 and 2018-19. Before 2017, legislators hadn't included many direct appropriations to nonprofits in the state budget in the past couple of decades. Many nonprofits were unaware that their organizations would be receiving state funding until after the state budget was approved. It is unclear whether legislators will include earmarks to nonprofits again in this year's budget.

 

Health coverage

Closing the 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. State legislators are considering two proposals to close the coverage gap:

  1. The NC Health Care for Working Families Act (H.B. 655), which has bipartisan support, 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.
  2. On the first day of the legislative session, Democrats in the House and Senate introduced bills (S.3 and H.B. 5) that would extend Medicaid expansion to North Carolina. Governor Cooper also included Medicaid expansion in his state budget proposal.

Legislative leaders, particuarly in the Senate, have expressed skepticism about Mediciad expansion, but it is possible that legislators could ultimately approve a proposal like the NC Health Care for Working Families Act to help close the coverage gap. The Center strongly supports efforts to close the coverage gap, since they would help nonprofits in two ways:

  1. By providing health coverage to many nonprofit employees who are currently in the coverage gap; and
  2. By reducing burdens on a wide variety of nonprofits that have to provide more basic services like health care, child care, affordable housing, and job assistance because more than 500,000 North Carolinians lack access to essential health care.

Association health plans

Center members consistently tell us that lack of access to affordable health coverage for their employees is one of the biggest operational challenges.One potential solution would be to create an association health plan (AHP) that would enable hundreds of nonprofits to form a larger pool of employees to band together and negotiate better rates on health insurance than individual nonprofits could get. This is not a possibility right now, because the NC Department of Insurance is not approving AHPs. However, the Senate has approved a bill (S.86) that would create a process for the Department of Insurance to approve AHPs. The House is considering a very different approach (H.B. 464) to establish standards for AHPs in North Carolina. Some key differences between the two approaches include:

  1. The House plan would require associations forming AHPs to have members with a commonality of interest based on either: (a) operating in the same trade, line of business, industry, or profession (an association of nonprofits would meet this criteria); or (b) being a statewide association of employers. The Senate bill would also allow regional associations of businesses and/or sole proprietors to meet this “commonality of interest” standard, even if they didn't operate in the same line of business. Practically, the Senate's approach could mean that cost savings from AHPs would only be available to nonprofits and businesses in certain parts of the state.
  2. The House version would require health plans offered by AHPs to include hospital and physician services and the essential health benefits that must be covered by Affordable Care Act health plans. This would help ensure that associations could not offer skimpy plans as a way of cutting costs.

The Center has not yet taken a position on these two proposals to allow AHPs in North Carolina. Potentially, AHPs could create opportunities for nonprofits to offer more affordable, high-quality health insurance for their employees. However, nonprofit health advocates have expressed concerns that the Senate AHP legislation would have the potential to create higher health care costs for some workers. There is a good chance that legislators will pass some type of law enabling AHPs in North Carolina this year. As legislators continue working on these proposals, the Center will advocate for changes that would ensure that more nonprofits have access to better, more affordable health coverage for their employees.

 

Nonpartisan redistricting

As we have explained in a previous blog post, North Carolina's gerrymandered congressional and state legislative districts put nonprofits at a major disadvantage in advocating on public policy issues. A handful of bills have been introduced this year to fix this by replacing North Carolina's partisan gerrymandering with various types of independent, nonpartisan redistricting processes. These proposals include:

  1. Using an independent redistricitng commission to use a nonpartisan process to draw the districts upon which legislators vote every 10 years (H.B. 69);

  2. Implementing a constitutional amendment that would shift the redistricting process to nonpartisan legislative staff (H.B. 140);

  3. Creating a 16-person independent redistricting commission that would work with an impartial special master to develop the redistricting plans on which the General Assembly would vote every decade (H.B. 648) ;

  4. Implementing a constitutional amendment to create a citizens’ commission to draw the state’s congressional and state legislative districts (S.641 and H.B. 574);

  5. Creating a  diverse 15-person citizens' commission that would use a transparent process to develop districts (S.673 and H.B. 827).

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.

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