David Heinen, Vice President for Public Policy and Advocacy, North Carolina Center for Nonprofits
When the N.C. General Assembly prepares to begin its 2019 session on January 30, legislators will almost certainly consider a wide range of policy proposals affecting the nonprofit sector. Here are the Center's predictions for four major state policy issues that will affect North Carolina's nonprofit setor this year.
Nonprofit tax exemption
In North Carolina, most 501(c)(3) nonprofits are exempt from paying state income and franchise taxes and local property taxes. North Carolina nonprofits pay sales tax when they purchase goods (and some services), but (most) nonprofits get the privilege of begging the state for refunds of (most of) the sales taxes they pay (as long as they keep good records and fill out the paperwork correctly). (Note: All the parenthetical disclaimers in the previous sentence should be a hint that the sales tax "exemption" process in North Carolina is far from perfect!)
If nonprofits had to pay state and local taxes, they would have significantly fewer resources available to provide essential programs and services in communities throughout North Carolina. This may not be a problem if most nonprofits were flush with extra cash. The reality, however, is that 56% of North Carolina nonprofits said last year that they didn't have enough resources to fully meet the demands for their services. New taxes on nonprofits will only make this situation worse, creating even more unmet needs in our communities.
The good news is that state legislators have sent a couple of encouraging signals in recent years that they recognize the importance of nonprofit tax exemption.
- In 2017, a Senate bill would have simplified the nonprofit sales tax exemption process by exempting nonprofits from paying sales tax at the point of sale rather than making them beg for refunds after the fact. While the proposal wasn't perfect, it was an important first step in reducing some of the red tape that currently exists for nonprofits seeking sales tax exemption.
- Last year, after Congress added a counter-intuitive new federal income tax on nonprofits' expenses in providing parking or transportation for their employees, the N.C. General Assembly wisely decided not to impose state income tax on nonprofits for these expenses.
The challenge for nonprofits is that many policymakers - particularly those who don't fully understand the work nonprofits do - assume that limiting or eliminating tax exemption is an easy, pain-free way to raise revenue for the state and local governments without raising taxes on individuals and businesses. Consequently, nonprofits will always need to be prepared to respond to proposals to limit sales tax refunds, eliminate property tax exemption, and impose other new taxes or fees on charitable organizations. To help nonprofits more fully fulfill their missions, legislators should not only resist the urge to create new taxes and fees on nonprofits, but should work to ensure that existing state and local tax exemption is administered in a way that is clear, consistent, and fair.
Incentives for charitable giving
One of the inevitable side effects of the Tax Cuts and Jobs Act that Congress hastily passed at the end of 2017 is that the cost of donating to nonprofits has risen for many middle class North Carolinians. Until 2017, nearly one-third of North Carolinians used itemized deductions on their federal taxes, which translated to a discounted price for their charitable contributions. Because the standard deduction was significantly increased beginning in 2018, only the wealthiest 5%-10% of taxpayers now receive this tax benefit for their charitable contributions. While this change doesn't mean that every donor will give less to every nonprofit they have supported (or stop contributing altogether), it will certainly mean fewer overall donations to charitable nonprofits. In fact, we have already heard from some organizations that year-end giving was down in 2018 and from more that expect donors to give less in 2019 once they have filed their taxes under the new structure for the first time realize that their charitable contributions are no longer reducing their tax bills.
A natural way to ensure that tax law changes don't reduce charitable giving would be to create a universal, non-itemizer charitable deduction or credit so that all Americans - regardless of their income level - have incentives to give generously to the work of charitable nonprofits. With the partisan divide in Washington likely creating gridlock in Congress this year, it seems unlikely that a common sense solution like Congressman Mark Walker's Universal Charitable Giving Act will gain much traction. That may mean that the best hope for new incentives for charitable giving may come at the state level. State legislators would be wise to consider reinstating a non-itemizer credit or deduction on state taxes. Lawmakers also could encourage businesses and seniors to give more generously by aligning the state tax code with federal laws for corporate charitable deductions and for donations made as distributions from individual retirement accounts.
Every 10 years (after each U.S. Census), state lawmakers decide on the maps that will be used for North Carolina's congressional and state legislative districts for the next decade. The next round of redistricting will take place in 2021. Traditionally, lawmakers in the majority party in the General Assembly (regardless of which party has been in power) have used the redistricting process as an opportunity to "gerrymander" districts to keep their party in power by packing like-minded voters into the same district, while creating a majority of districts that strongly favor their own political party. With gerrymandered districts, most legislators (from both major political parties) have relatively non-competitive general elections. Instead, our elected officials are largely selected by partisan political insiders and major campaign donors. This means that most elected officials listen more closely to their partisan political donors than to the constituents whom they ostensibly represent. Since 501(c)(3) nonprofits are the voices of their communities but are not (and should not be) politicial donors, gerrymandering significantly reduces nonprofits' influence on public policy. Replacing our current gerrymandered system with an independent, nonpartisan redistrictring process would help ensure that nonprofits have a meaningful voice in policy matters related to their missions.
This year may offer the best opportunity in decades for North Carolina to switch to an independent, nonpartisan redistrcting process. Historically, whichever party is in the minority in the General Assembly has championed nonpartisan redistricting, while the party in power has dismissed these proposals, since eliminating gerrymandering could jeopardize their "guaranteed" legislative majorities in future elections. However, there is enough uncertainty surrounding the 2020 election - and around federal and state court cases challenging the legality of North Carolina's current congressional and legislative districts - that lawmakers from both parties may have reason to fear that the other party will be in charge of drawing distrct lines in 2021. Nonprofits should take this opportunity to support proposals for independent, nonpartisan redistricting this year, since this systemic change in our electoral process would give nonprofits the opportunity to truly be heard by elected officials as the voices of our communities.
Access to health care
Currently, more than 200,000 North Carolinians (and the "more than" may be a significant understatement!) 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. Over the past two years, policymakers from both major political parties have put forth proposals for North Carolina to begin accepting federal funding to expand access to affordable, quality health coverage to the many North Carolinians who are currently falling through the cracks. Whether it is called "Medicaid expansion," "closing the coverage gap," "Carolina Cares," or something else, nonprofits should work with policymakers to help fix this significant and growing (but eminently fixable) barrier to health care access for many people in our state.
. . . And and much more
The Center has many other nonprofit sector policy issues on our radar screen this year. To learn more about these, we encourage you to check out our preliminary draft of the 2019 Public Policy Agenda for North Carolina's Nonprofit Sector. We will be finalizing this in February, and we would greatly appreciate your input about which nonprofit sector policy issues matter the most to your organization. We are certainly open to adding, deleting, tweaking, and prioritizing items on this list!