Marijuana Tax for Good? It’s Still Regressive

(Marijuana plants growing at a dispensary)

The city of Aurora, Colorado has chosen to spend some of its tax revenue from marijuana sales on a worthy project.

City officials announced plans to spend $1.5 million of the projected $4.5 million in marijuana tax revenue it will take in over the next two years on combatting homelessness and supporting other nonprofit causes. To kick off the new initiative, Aurora City Council members voted to direct $220,000 to the Colfax Community Network to cover general operating expenses. The vote also included the provision of funding for Comitis Crisis Center and Aurora Mental Health for homeless outreach.

Los Angeles is considering a similiar approach with a tax on revenue from medical marijuana, which – should the proposed measure pass – could generate up to $16.7 million annually. If the state fully legalized marijuana as Colorado, Washington, Alaska, and Oregon have done, the resources generated for anti-homelessness programs in California would greatly expand beyond that figure.

While the emergence of a brand new revenue stream directed toward social good causes is objectively positive, the fact remains that the resources stem from a regressive tax. Sin Taxes – as tariffs that tax habits considered unhealthy by the general consensus are known – have attracted disapproval from across the political spectrum for their negative impact on poorer Americans.

Along with other forms of regressive taxation – such as sales taxes – these tariffs disproportionately harm economically disadvantaged citizens, who are less equipped to cope with the larger hit on their finances that certain consumer behaviors cause. Smokers, drinkers, and gamblers are the traditional targets of such taxes.

A recent trend also includes higher taxes on sugary beverages and fatty junk foods.

Ostensibly, these taxes are intended to alter behaviors that have a negative effect on society while generating revenue to account for the deleterious results that stem from those behaviors. But as a trio of economists discussed in an op-ed for U.S. News, the taxes do not quite achieve their supposed aim:

[T]he orthodox justification for sin taxes was that they would reduce the costs smokers, drinkers, and gamblers impose on others—drunk driving, exposure to secondhand tobacco smoke, and losing the family paycheck at the craps table. But that rationale was a nonstarter because of the relatively small impact these taxes have on the sinful consumers’ behavior. Such taxes may “nudge” consumption in the desired downward direction, but bad habits are hard to break.

As these and other economists argue, there is evidence that these taxes produce a positive social benefit. And while wealthier citizens can simply stomach the higher cost of their favorite bad habit, poorer citizens are financially sapped. Indeed, the further immiseration lends itself to a feedback loop, in which people living in an increasingly stratified economy with less money turn to their bad habits for solace.

A widely-discussed study from last year supported these claims, finding that white working Americans have seen a decline in life span, resulting in part from greater alcohol and drug abuse attributed to economic insecurity.

The tax on marijuana in Colorado is actually lower than the rates applied to alcohol and gambling. Nonetheless, the simple fact that the burden of the tax – like all consumption taxes – falls primarily on the poor gives one pause for thought: Why do so many initiatives aimed at helping the poor fall largely on the backs of poor taxpayers?

The increase in revenue for the homeless in Aurora is good news, but this qualified success should not halt efforts to design and implement more equitable, just alternatives to public social good fundraising.

The Panama Papers & David Cameron: How Tax Havens Hurt Nonprofits

(British Prime Minister David Cameron)

Tax policies – and the politicians that compose, debate, and codify them – affect nonprofits. From the IRA-to-charity rollover to deductions to incentivize philanthropy, tax polices in the United States have a direct impact on people’s giving behavior. When politicians make it simple for the wealthy to stash funds away in tax havens across the globe, they are indirectly cheating charitable organizations of invaluable revenue streams.

Across the Atlantic in Britain, this reality is no less true, and details emerging from the Panama Papers with regard to Prime Minister David Cameron’s family wealth and actions on behalf of offshore trusts have created an air of mistrust and the possibility of a conflict of interest.

Cameron’s late father – Ian Cameron – was a client of Mossack Fonseca, the Panama-based offshore tax firm at the heart of the ongoing tax haven revelations. The elder Cameron set up an investment fund called Blairmore Holdings, Inc. through Mossack Fonseca. A prospectus released by the fund bluntly stated that it “should be managed and conducted so that it does not become resident in the United Kingdom for United Kingdom taxation purposes.” It did so by utilizing an intricate system of untraceable certificates, called “bearer shares,” along with situating its officers in the Bahamas.

The behavior of David Cameron’s father is a reflection of how closely connected the world’s political and financial elite are to the tax avoidance schemes detailed in the Panama Papers. While there is not currently evidence that the prime minister was directly connected to the fund, the details shed some unsettling light on his efforts to shield trusts from an EU crackdown on tax shelters in 2013.

At the time, the EU was debating whether or not to publicly reveal a registry of actual asset holders at the helm of offshore shell companies. In a letter to Herman Van Rompuy – then president of the European council – Cameron stated that it

is clearly important we recognise the important differences between companies and trusts … This means that the solution for addressing the potential misuse of companies – such as central public registries – may well not be appropriate generally.

While it is yet uncertain if Cameron was acting on behalf of certain parties, a Downing Street spokesperson refused to answer questions from the press as to whether or not Cameron still held assets in his father’s former offshore interests.

The prime minister’s family history and actions are part of a larger trend. A culture of tax avoidance runs throughout elite circles in the Western world. In Britain, Michael Geoghegan – the former head of HSBC – attempted to shirk an £8 million tax on his luxurious townhouse, creating an elaborate offshore arrangement through which he could rent the house to himself using a shell company registered abroad. Geoghegan is among the highest profile leaders of the Brexit movement, which seeks to extricate Britain from the EU – the multinational body that is actively trying to clamp down on offshore tax havens.

This culture generates a rift between the ultra wealthy and the rest of society, depriving countries of important financial resources not only through the deprivation of tax dollars to fund government programs, but also by circumventing the system of incentivized charitable giving. Coupled with the fact that the tax havens exist in the same shadows that permit the actions of sanction-breaking firms selling energy to war crime-perpetuating governments – along with other forms of criminal behavior – and the continued existence of tax loopholes across the world is a menace to charitable organizations and their causes.

Nonprofit Helps Explain Panama Papers

(Skyline of Panama City, home to the headquarters of Mossack Fonseca)

The single biggest leak in history has taken the news media by storm, as journalists from across the globe sort through 11.5 million documents pertaining to the inner-workings of the secretive Mossack Fonseca – a Panama-based offshore law firm that has assisted scores of the global elite skirt taxes.

Süddeutsche Zeitung – a German newspaper – received the enormous batch of documents from an unnamed whistleblower, and has shared them with the International Consortium of Investigative Journalists, a nonprofit that specializes in global stories relevant to the cause of public integrity.

The organization has set up a fascinating portal dedicated exclusively to the documents, collectively known as the Panama Papers. News outlets, writers and journalists will probably not uncover the extent of the revelations for a while longer, as the 11.5 million document cache poses a massive task for researchers.

Leading the news over the past several days, however, have been a variety of stories detailing elite abuse of tax havens to shield wealth, as well as firms circumventing international sanctions to do business with parties accused of war crimes.

The Icelandic Prime Minister Sigmundur Davíð Gunnlaugsson faced calls for a vote of no confidence from opposition parties – as well as a 10,000 strong protest outside of the Icelandic parliament – following the revelation that Mossack Fonseca helped the prime minister’s wife set up an offshore company that held massive claims on Iceland’s collapsed banks following the financial crisis.  While Gunnlaugsson sold his share in the company before ascending to the seat prime minister and there is no direct evidence of corruption, the arrangement represents a flagrant conflict of interest for a nation still reeling from the financial collapse.

David Cameron – the prime minister of Britain – has also come under scrutiny as evidence has emerged that his father has used Mossack Fonseca’s services to keep family wealth overseas.

In an even more nefarious case, Mossack Fonesca provided legal service for Pangates International Corporation Limited – a sanctioned company that sells aviation fuel to the Syrian military, which has committed countless war crimes against the Syrian people including indiscriminate shelling of civilian areas. Additionally, the firm worked on behalf of Rami Makhlouf, cousin to the Syrian president and widely known figure of corruption within the Syrian regime.

Also of note are findings that confirm long-held suspicions that Putin uses personal proxies to store vast sums of wealth abroad. Russia – deemed a “mafia state” by some analysts – appears more than ever to host a generally corrupt elite that maintains billions of dollars in wealth abroad via tax havens and shell companies, some of which are tied to Mossack Fonseca.

The International Consortium of Investigative Journalists has done an outstanding job pursuing its mission “to bring journalists from different countries together in teams – eliminating rivalry and promoting collaboration” in an effort “to be the world’s best cross-border investigative team.” The organization’s writers have compiled an astonishing array of corruption tales that throw into sharp relief the disjunction between the mega-wealthy global elite and the rest of the world’s population.

Tax avoidance hurts nonprofits, both in the decrease of public funds available for grant making as well as scarcity of philanthropic donations from wealthy individuals more interested in stashing wealth abroad than making charitable gifts to take advantage of tax incentives for philanthropic behavior. Throw in the damning evidence that offshore tax havens and shell companies help perpetuate global injustices that nonprofits work day-and-night fighting against, and there is a natural opposition between the social good and the shadowy dealings of Mossack Fonseca.

As more information emerges from the Panama papers, Key Elements Group will provide ongoing coverage of stories relevant to the nonprofit world.

Maine Nonprofits Face Hefty Property Tax

In a move to cut state taxes, Maine Gov. Paul LePage has provoked the ire of a number of his state’s towns and nonprofits.

Ending state revenue sharing with municipalities is an essential component of the governor’s proposal. The revenue sharing system currently in place helps keep property taxes down across the state, enabling towns to tap into state resources to pay for vital services. In order to make up revenue lost in his budget plan, LePage hopes to implement a regressive sales tax increase and to begin charging property taxes on nonprofits that possess $500,000 or more in land holdings.

LePage’s budget plan would reduce income tax of the wealthiest citizens – slashing the rate from 7.95 percent to 5.75 percent – and terminate the estate tax. Analysts predict that the proposal will take up a lion’s share of the state legislature’s attention this session, describing the plan as a cornerstone of the governor’s agenda.

According to the Maine Municipal Association, most towns and cities would suffer from the legislation, compelling local governments to hike taxes in order to pay for services including education and snowplowing. Communities with large nonprofit institutions – from scientific labs to private colleges – could theoretically benefit from the scheme, albeit at the expense of these organizations. Rural areas with low concentrations of nonprofits would likely feel a squeeze and witness property tax increases as well as service cuts.

Maine has 86,000 individuals working for charities and nonprofits state-wide. Of these workers, 37 percent are employed by hospitals, which consist of four out of ten of the state’s largest employers. Hospitals would pay up to $20 million under the tax proposal. A number of other nonprofit institutions – including colleges, museums, summer camps, veterans’ fraternal groups, food pantries, and shelters – would be adversely affected by the property tax expansion.

In South Portland, the American Legion Post and the Girl Scouts stand to lose out due to the high value of their properties. Another nonprofit – Auburn’s Good Shepherd Food Bank – announced that the tax would force it to cut its free meal distribution by 100,000 units. Shalom House, which provides mental health services, would face a $90,000 tax bill, drastically curtailing its services.

Private colleges and schools would face large tax increases. Berwick Academy – the oldest private school in the state – maintains property valued at $14 million, meaning that the governor’s plan would compel the school to pay a six-figure tax. Berwick Academy’s small endowment falls far short of the funds necessary for this expense. The school would have to slash financial aid, reduce staff, and raise tuition in order to cope.

The property tax would not apply to religious groups or government-owned institutions. The list of potential parties affected by the tax, however, is extensive, and could hit nonprofit cemeteries – which often possess highly valued land – community theaters, and land trusts. Additionally, nonprofits that receive bequeathed property could face steep taxes, diminishing the intended value of philanthropic gifts.

The plan appears to be part of a larger trend of states tapping into nonprofits to provide for revenue shortfalls or tax cuts. The nonprofit sector is worth billions of dollars, and may seem to be a prime target for taxation. Take the current New Hampshire legislation which aims to apply the state’s Business Enterprise Tax to nonprofit institutions. This strategy poses great risks, considering that nonprofits’ tax-exempt status is one of the chief reasons why they are capable of providing essential services otherwise neglected by the private sector. With scores of nonprofits facing radical tax hikes, the availability and efficacy of their services are under threat, as well as the livelihoods of nonprofit workers.

Goodell’s Big Bonus Adds Scrutiny to the NFL’s Nonprofit Status

The NFL released its 2013 tax filing on February 13, revealing a gigantic sum awarded to Roger Goodell for his work as the league’s commissioner: a whopping $35 million.

Goodell’s net earnings consisted of his annual $3.5 million salary, along with an additional $31.1 million bonus decided upon by a small coterie of NFL team owners.

The announcement comes at a sensitive time for the NFL. Amidst high-profile domestic abuse cases and the ongoing debate concerning players’ long-term health issues, the tremendous size of Goodell’s paycheck throws yet another controversial element of the league’s operations into sharp relief: the NFL’s status as a 501(c)6 tax-exempt nonprofit.

Technically a “trade organization” under its unique nonprofit status, the NFL does not pay any corporate taxes, even though its annual revenue hovers around $9.5 billion. Other sports enterprises share this unique designation, including the National Hockey League, the Professional Golfers Association Tour, and the Professional Rodeo Cowboys Association.

The NFL’s special treatment dates to 1966, when the National Football League merged with the American Football League. Congress passed Public Law 89-800, an arcane provision which essentially expanded antitrust exemptions to include professional football, allowing the newly established league to act as a monopoly in setting highly lucrative television fees.

The same year, NFL lobbyists successfully procured an addendum to Section 501(c)6 of 26 U.S.C. of the Internal Revenue Code that broadened the criteria for what sorts of organizations qualify for tax-exemption to specifically include professional football leagues.

The NFL’s privileged role vis-a-vis the average tax payer is further underscored by the generous amount of public funding the league’s highly profitable teams receive. According to urban planning specialist and Harvard faculty member Judith Grant Long, a number of teams – 12 in all – have turned profits on public subsidies alone, not including any of the immense profits garnered by the teams through ticket sales, concessions, or broadcasting rights.

A bipartisan group of lawmakers, however, are challenging the league’s tax-exempt status. Rep. Jason Chaffetz, representative of Utah’s 3rd district, is championing such a bill. ”To say establishments like the NFL are not for profit organizations is laughable. They are a for-profit and should be taxed as such,” the lawmaker told Buzzfeed.

Local politicians are putting the pressure on as well, as a group of legislators in New York City are pushing bills that would revoke the NFL’s nonprofit status within the state. This measure wouldn’t hold up against federal tax law, but is designed to pressure national legislators to take action.

Currently, public opinion concerning the league’s tax exemption is tepid. Indeed, only 13 percent of survey respondents could accurately identify the league as a nonprofit. But debate over the issue is growing. A petition on change.org titled “Revoke the Tax-Exempt Status of the National Football League” currently has nearly 429,000 supporters.

In the long-run, a number of factors will likely influence what ultimately happens to the league’s tax exemption status. The NFL’s extraordinary profits alone make it easy to question its nonprofit categorization, but the added scrutiny brought about by its bungled response to recent domestic violence controversies as well as the longterm medical issues suffered by retired players will likely elevate the discussion further.

Proposed Legislation Would Apply Business Tax to New Hampshire Nonprofits

State Rep. David Hess has proposed legislation that would treat large New Hampshire nonprofits as private businesses, subjecting them to the state’s Business Enterprise Tax (BET). If successful, the bill would exact a heavy toll on the state’s nonprofit sector. New Hampshire Catholic Charities, for example, would have to pay out around $200,000 annually in BET taxes if the bill passes.

The BET is among the most profitable taxes in New Hampshire, responsible for $219.6 million in state revenue during 2014. It is currently a fixed rate of .75 percent on interest, dividends, and wages at large private businesses. Currently, 501(c)3 organizations are exempt from the tax.

An estimated 88 nonprofits would feel the effects of the legislation, among them the New Hampshire Alliance of YMCAs, institutions of high learning, and nonprofit hospitals.

The effort appears to be part of a larger, party-line battle on taxation and the future of state budgeting. Republicans have proposed two bills which would deprive the state government of a combined $42 million in revenue. One bill would reduce the state’s profits tax from 8.5 to 8 percent, and the other would address the BET, with an aim of lowering the rate from .75 percent to .675 percent.

Discussing the proposed legislation, Rep. Hess remarked that the legislation was not to raise additional revenue for the state, but rather to pave the way for a general lowering of the BET by spreading the burden of taxation. As for putting nonprofits on the hook to pay the difference, Hess commented that, “If it acts like a business, has a business plan, walks like a business … maybe it should be taxed under the Business Enterprise Tax like its competitors.”

Criteria for what “acts” and “walks” like a private business, however, differ among leading nonprofit voices in New Hampshire.

As Mary Ellen Jackson of the New Hampshire Center for Nonprofits states in an op-ed appearing in the Concord Monitor, “nonprofits are able to conduct their work in highly economical ways is because they operate on business models that leverage volunteers, donations and private grants and because they pour all profit back into mission, not shareholders pockets.”

Jackson points out that a number of institutions providing essential services to New Hampshirites would be affected, including mental health centers, disability services programs, nonprofit nursing homes, and affordable housing groups, and that their work would be undermined by the addition of an onerous tax that was not designed for application to nonprofits.

Outside of the financial pinch on nonprofits, the tax cuts would also result in an overall loss in state revenue that would nearly amount to the entire annual budget of the state’s community college system, thereby threatening such vital services.

Considering that the Tax Foundation ranked New Hampshire seventh in the nation for ideal business tax environment, the proposed legislation is misguided and unnecessary. By sequestering a sizable portion of nonprofits’ resources, the legislation would force organizations to cut their services, having a direct negative impact on the nonprofits’ beneficiaries while simultaneously dampening the appeal of vital jobs in the nonprofit sector.

Congress Gives Partial Extension to IRA-to-Charity Rollover

On December 16, the U.S. Senate voted to extend several charity tax breaks through only the end of 2014, though many in the nonprofit sector want a permanent implementation of the policies.

Many fundraising professionals support the IRA rollover tax break in particular, which they want implemented permanently. Before the vote, the tax breaks only applied to 2013 tax filings, but are now slated to apply to donations made by the end of the 2014 calendar year.

Enacted in 2006, the IRA tax-to-charity rollover allows 70-1/2 or older U.S. citizens to donate up to $100,000 from their Individual Retirement Accounts (IRAs) to public charity without being taxed. According to some sources, older philanthropists were waiting to see the result of the vote before making giving decisions in the final weeks of 2014.

The IRA-to-charity rollover encourages charitable giving among older prospective donors – especially those who do not itemize their donations. The tax break allows individuals to give large sums from their IRAs to charity without that allotment applying to their adjusted gross income. Additionally, the donations are applicable to required minimum deduction. This means that on joint-tax returns, a spouse can used a Qualified Charitable Distribution (QCD) to exclude up $100,000 per his/her partner’s charitable giving through the IRA rollover.

In the past, Congress has voted on the retroactive applicability of the IRA rollover tax. If Congress picks up the debate again and passes similar legislation, the tax break could theoretically apply to the 2015 calendar year.

Other tax breaks given partial extension through the end of 2014 include conservation donation incentives that help modest-income landowners contribute to land conservation efforts and food inventory gift incentives that encourage farmers to donate excess food stock to food banks.

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