Tuesday, September 4, 2012

Are Charitable Tax-Exempt Bonds Potentially on the Tax-Reform Chopping Block?

One of the "big three" benefits of being classified as a charitable entity under Section 501(c)(3) is the ability to issue tax-exempt bonds under Code Section 145.   While this isn't something you'll see much with small charities, hospitals and universities are major bond issuers.

But charities are just a portion of the exempt bond market.  According to IRS Statistics of Income data, about 75% of the exempt bonds issued in 2009, for example, were issued by state and local governments ("munis" as they are called).   And munis appear to be on the radar screen of conservative tax reformers - an article in Forbes (also picked up by the Christian Science Monitor) noted that Mitt Romney's economic advisor, Glenn Hubbard, recently indicated the tax break for munis could be limited as part of a tax reform package; and Matt Jensen of the American Enterprise Institute has suggested this as part of a reform package, as well.

So far, these suggestions have been directed specifically at munis; exempt bonds issued by charities have not specifically been mentioned.  But if one goes down this road, one wonders if munis will be a logical stopping point.  After all, the issues involved (e.g., whether this is an efficient way for the federal government to subsidize economic activity, particularly if tax rates in general are lowered in a reform package) are similar, though perhaps one could argue that federal subsidization of charities via exempt bonds is "better policy" (or maybe just different!) in some way than subsidization of state and local governments.  I'm not so sure I can adequately distinguish between "private" public goods provided by charities and "public" public goods provided by state and local governments as an economic matter, though the politics certainly are different.  But the charitable sector should not take for granted that limits on exempt bond financing will stop with munis . . . after all, President Obama already proposed a limit on the charitable deduction for high-income individuals.  



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