The President's faith-based initiative, the Community Solutions Act (H.R. 7), will be going to the House floor Wednesday, July 18. This is a bad bill that should never become law. Even if you have no position on "charitable choice" – the notion of giving religious congregations federal funds and relaxing federal rules – the major charitable giving provisions have become so watered down and extract such a huge fiscal limitation that they are not worth it. This analysis provides a summary of the bill as it goes to the House floor and the political outlook for the bill. The charitable choice provisions are highly controversial in the nonprofit community. OMB Watch, for example, has always supported 501(c)(3) faith-based organizations being eligible for federal funding. However, H.R. 7 is not about that; it is about giving government grants to religious congregations – not 501(c)(3) organizations -- where the separation of church and state will become very murky, accountability standards will be less than for other types of federal grantees, and program standards are able to be waived. This disrupts service delivery, especially when there are no new funds. That is why we oppose the charitable choice provisions (click here for more information). At the same time, President Bush has talked about the importance of charitable choice. Conservative organizations and some religious organizations have echoed the President's strong support for charitable choice. Opponents of the bill feared that the charitable giving provisions in the bill (e.g., the non-itemizer deduction) might propel the bill, but the latest changes in charitable giving provisions make it far less attractive (see below), although Independent Sector is still supportive. And recent revelations that the White House had private meetings with the Salvation Army to get their support for the bill, along with the Army spending as much as $110,000 per month for a lobby campaign, in exchange for regulatory changes to grant rules that the organization wanted, may have damaged the President's chances to move the initiative. Even if the bill passes the House, it faces a major hurdle in the Senate. The charitable giving tax provisions will require an offset of $13.3 billion, which will eat up any remaining surplus and probably dip into the Medicare Part A trust fund. This will likely preclude other tax or spending initiatives. Moreover, the Senate does not have any appropriate tax vehicles currently planned for the charitable giving provisions. The charitable choice provisions also face a hurdle since Sen. Joseph Lieberman (D-CT), a supporter of faith-based initiatives, has joined others in expressing concerns about the President's plan. Nonetheless, Majority Leader Tom Daschle (D-SD) has told the President he would allow debate on the faith-based initiative at some point. Summary of the Bill The bill has three major components to it – charitable giving, charitable choice, and Individual Development Accounts. Charitable Giving The major charitable giving provisions are:

• Non-Itemizer Deduction: The President and charities widely support a tax change to allow taxpayers who do not itemize on tax returns to fully deduct charitable contributions (beyond the current standard deduction). The cost for such a provision is $84 billion over 10 years. Because of the recent tax cuts, there is not enough money to pay for the non-itemizer, and there is not enough political will to pay for the deduction through other offsets. Yet the President has leaned on Ways and Means Chair Bill Thomas (R-CA) to do something on the non-itemizer because it was part of his campaign pledge and is being used to move the more controversial charitable choice part of the bill. The result has a been an emasculated non-itemizer deduction. The bill creates a cap on the amount that can be deducted by non-itemizers. The cap is as follows:     mso-padding-alt:0in 5.4pt 0in 5.4pt'>   style='font-size:11.0pt;mso-bidi-font-size:12.0pt;font-family:Arial'> style='font-size:11.0pt;mso-bidi-font-size:12.0pt;font-family:Arial'>Maximum Deduction   style='font-size:11.0pt;mso-bidi-font-size:12.0pt;font-family:Arial'> font-family:Arial'>Year font-family:Arial'>Individual font-family:Arial'>Couple font-family:Arial'>Value of Deduction font-family:Arial'>2002 font-family:Arial'>$25 font-family:Arial'>$50 $3.75 to $7.50 font-family:Arial'> font-family:Arial'>2003 font-family:Arial'>$25 font-family:Arial'>$50   style='font-size:11.0pt;mso-bidi-font-size:12.0pt;font-family:Arial'> font-family:Arial'>2004 font-family:Arial'>$50 font-family:Arial'>$100   style='font-size:11.0pt;mso-bidi-font-size:12.0pt;font-family:Arial'> font-family:Arial'>2005 font-family:Arial'>$50 font-family:Arial'>$100   style='font-size:11.0pt;mso-bidi-font-size:12.0pt;font-family:Arial'> font-family:Arial'>2006 font-family:Arial'>$50 font-family:Arial'>$100   style='font-size:11.0pt;mso-bidi-font-size:12.0pt;font-family:Arial'> font-family:Arial'>2007 font-family:Arial'>$75 font-family:Arial'>$150   style='font-size:11.0pt;mso-bidi-font-size:12.0pt;font-family:Arial'> font-family:Arial'>2008 font-family:Arial'>$75 font-family:Arial'>$150   style='font-size:11.0pt;mso-bidi-font-size:12.0pt;font-family:Arial'> font-family:Arial'>2009 font-family:Arial'>$75 font-family:Arial'>$150   style='font-size:11.0pt;mso-bidi-font-size:12.0pt;font-family:Arial'> font-family:Arial'>2010 font-family:Arial'>$100 font-family:Arial'>$200 $15 to $30 Arial'> font-family:Arial'>2011 font-family:Arial'>$100 font-family:Arial'>$200 $15 to $30 Arial'>   Independent Sector has calculated that the current average annual giving of a non-itemizer is $328. Given the maximum deduction will only apply to $100 in charitable contributions – and that would be in 9 years from now – it means that this bill will provide no incentive for new giving. Yet the cost for this deduction is $6.37 billion over 10 years. (In the last year of the bill, the non-itemizer will cost $1.25 billion, demonstrating that the cost will be substantially more in the second 10 years.) This raises serious questions about the benefits derived from such a large expenditure and the impact on other initiatives that cannot be funded. For example, does use of this money for the non-itemizer preclude an expanded prescription drug program for elderly individuals, repairing our aging schools, or cleaning up the environment? Rep. Earl Pomeroy (D-ND) raised the priority question when he said this was a "shot across the bow of the appropriators, that this committee is going to grab all of the available surplus." He and other Democrats pointed out that by 2003, this bill will result in dipping into the Medicare Part A trust fund. Thomas did not disagree that the tax committee was gobbling up surplus resources for tax initiatives at the expense of spending programs.
• IRA Rollover: The bill permits taxpayers who are 70.5 years of age or older to donate money tax-free from traditional or Roth Individual Retirement Accounts to qualified charitable organizations. This would start in 2002, and has been widely supported by charities. It would cost $2.75 billion over 10 years.
• Foundation Excise Tax: The bill would change the excise tax imposed on non-taxable private foundations to 1% on net investment income. Currently foundations are subject to a 2% excise tax on their net investment income with the 2% rate reduced to 1% under certain requirements. The two-tier rate system is eliminated in favor of the straight 1% tax. The Council on Foundations (COF) advocates complete repeal of the excise tax, which they did not get. COF also argues that the extra foundation funds would go into grant support. However, there is nothing in the bill that requires foundations to use the extra funds generated from the lower excise tax to be spent on grants by foundations. This will cost $2.17 billion over 10 years.
• Liability Protections for Contributions: The bill protects businesses from civil liability relating to any injury or death that results from contributions to nonprofits that involve equipment, facilities, motor vehicles, aircraft, and tours. The bill preempts state laws except where state laws provide additional protections for businesses against liability. In other words, assuming there was no gross negligence or intentional misconduct, a business can donate a run-down bus to a nonprofit child care center to get a tax write-off. And they will be protected against a lawsuit even if the bus malfunctions and kills the children riding in it.
• Other Tax Provisions:
  1. The bill increases the limit on corporate charitable contributions from 10% to 15% of modified taxable income. This is phased in so that the limit goes to 11% in 2002 through 2007, 12% in 2008, 13% in 2009, and 15% in 2010 and thereafter. Of course, very few corporations give up to the 10% limit now. That is one reason that it will only cost $917 million over 10 years.
  2. Allow all trades or businesses, not just C corporations, to receive an enhanced deduction for donations of "apparently wholesome food," and provide valuation rules for such donations. Cost is $626 million over 10 years.
  3. Impose a 100% excise tax on unrelated business taxable income of taxable private foundations (e.g., charitable remainder trusts). Cost is $55 million over 10 years.
  4. Allow shareholders of S corporations to increase their basis to permit them to take a full charitable deduction for contributions made by the S corporation. Cost is $397 million over 10 years.
  5. Modify the self-constructed property rule that applies to certain charitable contributions of scientific property used for research and computer technology and equipment. Cost is $10 million over 10 years.
  The total cost of the tax items is $13.3 billion over 10 years.

Charitable Choice The major charitable choice provisions are:

• Allows Religious Activity to be Concurrent With Services. Although the bill prohibits use of funds from federal grants or cooperative agreements for proselytization, it allows activities that promote religion to be interwoven with federal services. Beneficiaries would be required to opt-out of the religious portion of a program if they do not wish to participate. Republicans rejected an amendment in committee that would have prohibited proselytizing, worship or religious instruction during delivery of federally funded services.
• Vouchers Could Replace Social Safety Net. The bill allows all or part of any program covered by the Act to be converted to "indirect assistance," defined as vouchers or certificates, if the Secretary of the funding agency finds it to be "feasible and efficient." This could result in entire federal programs being converted to vouchers, where program recipients could be forced to participate in religious activity in order to receive services. Nonprofits that wish to provide services would find it difficult to plan or budget, since they would not be able to anticipate how many requests for service will be made or how long it would take to be reimbursed. Precious resources would be diverted to outreach rather than reserved for the services themselves. Beneficiaries may find that the services they need are not available in their area.
• Beneficiary Rights Weakened. Congregations with federal grants or cooperative agreements cannot discriminate against program beneficiaries "in carrying out the program" on the basis of religious affiliation or belief. However, congregations that accept vouchers are only limited to non-discrimination in admission to programs.
• Unfunded Mandate. The bill requires agencies that administer federally funded programs to ensure that anyone that objects to receiving service from a religious organization is provided with an alternative that is accessible and of equal value. However, no funds are provided to cover the cost of such an alternative. The committee rejected amendments that prohibited funding a religious organization if a non-religious alternative is unavailable or would require that alternative service be equally accessible.
• Loosen Compliance. Congregations would be able to self-certify their compliance with a guarantee that people who apply for or receive federal assistance get notice of their right to opt out and get alternative services.
• Weak Accountability. Congregations that receive federal funds must only keep them in a separate, segregated account if the money comes from a grant or cooperative agreement. Funds from vouchers may be commingled with congregational funds. If a separate account is used, the federal government can only audit that fund. In addition, any organization providing services under programs covered by this bill would be allowed to conduct annual self-audits and submit copies to the appropriate agency. This language appears to nullify OMB Circular A-133, which requires grantees that receive more than $300,000 to use outside auditors. It appears that government agencies still have the right to inspect the books. Finally, there is no requirement that religious entities follow standards established for charities (e.g., annual reports to the IRS).
• Employment Discrimination. The revised bill withdrew a provision that would have allowed congregations to use religious practices as a basis for hiring, and instead permits them to consider religious affiliation. Civil rights groups continue to object to this expansion of the religious exemption to social services provided with federal funds. The committee approved amendments requiring compliance with all other civil rights laws.
• Lawsuits Against State and Local Governments. The bill eliminates monetary damages, limiting plaintiffs to injunctive relief, in lawsuits against local, state or federal governments for violation of the bill's provisions.

Individual Development Accounts The bill also expands Individual Development Accounts (IDAs) for low-income working families under the Assets for Independence Act. Funding for the program increases from $25 million per year to $50 million starting in FY 2002 and extending through FY 2008. IDAs allow individuals to save towards the purchase of a first home, pay college tuition, or support a small business enterprise. Participants receive between $1 and $8 in matching funds. Political Outlook for the Bill The President's push for his faith-based initiative has received major headlines recently, but in a way not pleasing to the administration. An internal Salvation Army memo indicated that the White House had made a "firm commitment" to modify OMB Circular A-102, which deals with grant rules for state and local governments, so that government-funded religious organizations could be free to discriminate against gays and lesbians in hiring and not provide domestic-partner benefits. In exchange for this regulatory change, the Salvation Army agreed to spend between $88,000 and $110,00 per month on promoting charitable choice. A number of members of Congress were stunned at the blatant quid pro quo and probed the White House on the accuracy of the report. In the last four days, the White House has had three different responses to the Salvation Army – from denying any commitments all the way to acknowledging senior White House involvement. The White House says it will not make the regulatory change. Aside from the unseemly White House lobby efforts, the faith-based initiative faces an edgy House. The bill was reported out on a largely party line vote from the Judiciary Committee (on June 28), which has oversight of the charitable choice provisions, and the Ways and Means Committee (July 11), which has oversight on the charitable giving tax provisions. In the Ways and Means Committee, Democrats offered two major amendments. One was to offset the cost of the bill and the other was to impose a "trigger" that would halt the tax breaks if it meant dipping into the Social Security or Medicare Part A trust funds. The offset, which would have scaled back the tax break for the wealthiest taxpayers just enacted by 0.2% in 2002-2005 and by 0.5% from 2006-2010, was defeated on a party line vote. The trigger was defeated on a party line vote but also had Rep. Amo Houghton (R-NY) crossing over to vote for the trigger. The charitable giving provisions are not controversial. However, because of the large tax cut just enacted, the cost of the provisions – even in their watered down version – may prove too much. The charitable choice provisions, unlike the charitable giving provisions, are highly controversial. It is unknown whether votes for or against the charitable choice provisions will fall along party lines.