Over 3.8 million words filling up over 5,000 pages using small type—yes, that is the U.S. tax code we know and love.
Now, the Senate Finance Committee Chairman Max Baucus and Ranking Member Orrin Hatch say they will be moving forward with comprehensive tax reform from a “blank slate” approach—that is, a tax code without all of the special provisions in the form of exclusions, deductions, credits, and other preferences. There is no projection on how many words or pages would be eliminated!
The senators observed that the tax code is “littered with preferences for special interests.” They indicated, “To make sure that we clear out all the unproductive provisions and simplify in tax reform, we plan to operate from an assumption that all special provisions are out unless there is clear evidence that they: (1) help grow the economy, (2) make the tax code fairer, or (3) effectively promote other important policy objectives.” In the House, the Ways and Means Committee Chairman Dave Camp applauded the Senate’s effort, saying “the Senate and House are on the same page” as they work “to fix our broken tax code.”
Senators have been asked to submit legislative language or detailed proposals relating to what should be included in a reformed tax code, as well as other provisions that should be added, repealed, or reformed. These submissions are due July 26. The Senate Finance Committee chairman intends for committee staff to work over the August recess on a bill that will be released in the fall.
What could Congress’ so-called “blank slate” mean to you and your church? While this approach may be one way to achieve a “simpler, more efficient and fairer tax code” as suggested by lawmakers, it does open the door to a number of significant impacts on churches.
From the list of hundreds of possible changes to the tax code resulting from the blank slate approach, perhaps the four most significant areas of interest include the charitable gift deduction, clergy housing exclusion, employer contributions for health insurance premiums, and exclusion of foreign earned income.
1. Charitable gift deduction. The charitable gift deduction has been part of the nation’s tax code since virtually the beginning of our federal income tax. The elimination of all deductions would include the charitable gift deduction, which has traditionally been regarded as one of the most effective policy tools at the government’s disposal to encourage individual charitable giving. While one would hope Congress would preserve this deduction in its current form, there are certainly no guarantees.
2. Clergy housing exclusion. The blank slate would also wipe away the clergy housing exclusion, which is so beneficial to hundreds of thousands of clergy. The exclusion was first adopted in 1921, and when the law was modified in 2002, no member of Congress voted against it (quite a rare occurrence!). Any change to the clergy housing exclusion should be very carefully considered, given that the provision has generated such strong bipartisan support and is so vital to both clergy and congregations across the country.
3. Church-paid health insurance premiums. Church contributions for health insurance premiums have long been excluded from income tax. Employees who are not given the opportunity to purchase health insurance through a church-provided plan are put at a major disadvantage. Eliminating this exclusion from the code would have the impact of greatly reducing the take-home pay for church employees who currently receive insurance through a church-provided plan.
4. Exclusion of foreign earned income. The foreign earned income exclusion is another one of the code provisions enjoyed by many missionaries sponsored by churches, which is at risk in a blank slate approach to tax reform. Under current law, U.S. citizens or resident aliens of the United States who live abroad are able to exclude a significant portion of their foreign earnings from taxable income (in addition to excluding or deducting certain foreign housing amounts). Missionaries in foreign countries would suffer great financial consequences if this exclusion were eliminated.
Tax reform is certainly a commendable goal. After all, the last major reform of the tax code was in 1986, and since then Congress has made more than 15,000 changes to the code. Setting our nation’s financial house in order is critical. In doing so, however, Congress should carefully consider potential impacts of any changes affecting churches.
There is no simple answer to the question of what Congress’ blank slate could mean to churches and their leaders. At this stage, some question whether tax reform can realistically be achieved in this deeply divided Congress. Additionally, there is no certainty as to what code provisions could be changed or eliminated even if Congress does indeed proceed with tax reform under the recently announced blank slate approach.
What we do know is that if any of the provisions on the chopping block are overhauled as part of tax reform, the financial implications will be significant for churches and their leaders.
At ECFA, we are diligently working to educate key leaders on Capitol Hill and raise awareness of the potential impact of these changes. To follow the latest developments on tax reform issues of interest to churches visit our In the News page at ECFA.org.
Dan Busby is president of ECFA (Evangelical Council for Financial Accountability), an accreditation organization that sets standards for governance, financial management, and fundraising/stewardship for churches and other nonprofits across the country.
Publication date: July 16, 2013