Text of an OMB Watch letter to Senators Joseph Lieberman and Rick Santorum concerning the CARE Act of 2002 (S. 1924) April 24, 2002 Hon. Joseph Lieberman Hon. Rick Santorum United States Senate Washington, DC 20510 Re: CARE Act of 2002 Dear Senators Lieberman and Santorum: We are writing on behalf of OMB Watch, a nonprofit organization that promotes government accountability and citizen participation in public issues and decision-making. OMB Watch works with and through the nonprofit sector because of its vital place in communities and our faith that the sector can play a powerful role in revitalizing our democratic principles. We wish to thank you for your efforts to find an acceptable legislative compromise to the President's faith-based initiative. We believe S. 1924, the Charity Aid, Recovery, and Empowerment Act of 2002 (CARE Act), represents a major improvement over H.R. 7, the Community Solutions Act, passed by the House of Representatives last summer. There are provisions in the CARE Act that we strongly support, some that we believe can be improved, and one provision we think needs major overhaul. There are also provisions in the bill on which we have no position. This letter addresses the provisions on which we have a position. We hope to work with you and other members of the Senate to improve the legislation as it moves forward. Provisions We Support

• Absence of "charitable choice" language - OMB Watch has always supported and encouraged faith-based organizations to be involved in the delivery of social services, as well as to provide leadership in pursuing social justice. This country has a rich history of faith-based organizations effectively being involved in service delivery and advocacy. Moreover, federal funds - through grants and subgrants -- have been used to support faith-based organizations in the delivery of social services when it is clear that the funds are not being used for religious activity and that there are accountability measures in place to verify the proper use of government funds. We continue to support this approach to government funding. Nonetheless we strongly opposed H.R. 7's "charitable choice" provisions. They raised five concerns for us:
  • People in need might be forced to opt-out of programs with religious content, placing an additional burden on their lives at a vulnerable time;
  • Religious congregations that receive federal funds would be allowed to audit themselves, including self-certification of compliance with federal program requirements, such as nondiscrimination;
  • Entire federal programs could be dismantled and substituted by vouchers, which would make it impossible for providers to plan and budget, and assumes a non-existent "marketplace" for many services;
  • Religious congregations would be allowed to discriminate on the basis of religious affiliation when hiring staff to provide services under federal grants; and
  • Even though federal funds could not be spent on religious activity, worship and promotion of religious beliefs could be seamlessly woven into delivery of federal services.
  Your bill is a significant improvement over H.R. 7 in that it does not promote these types of "charitable choice" provisions. Accordingly, we believe Title III, Equal Treatment for Nongovernmental Providers, is supportable. At the same time, we remain concerned that the Bush administration will use regulatory powers to implement many of the provisions we find objectionable in H.R. 7. These concerns have increased recently as a result of faith-based set asides in grant announcements for funding in the CSBG and SAMSHA programs. That is why we hope that Title III can be strengthened in the ways we describe below.
• Increased funding for the Social Services Block Grant (SSBG) - We strongly support the increased funding for SSBG in Title IV. We hope that such support will continue beyond FY 2004.
• Various charitable giving incentives in Title I - We support various provisions in Title I that strengthen new charitable giving. In particular, we support the provision to allow taxpayers to donate money from Individual Retirement Accounts tax-free to charitable groups. We would prefer the age limit for the IRA rollover to be lowered to 65, but nonetheless support the provision in your bill. We also support provisions to increase the charitable deduction for contributions of food, book inventories, and bonds (Section 104).

Provisions That Can Be Improved

• Two suggestions that would strengthen accountability of federal grantees - First, all federal grantees should qualify as a charity under 501(c)(3) of the tax code. Grantees should be required to file an annual, publicly available, tax report on finances and activities of the organization (IRS Form 990). Currently congregations and auxiliary organizations are not subject to the same public accountability standards as other public charities, by virtue of their exemption from filing Form 990. (See 26 CFR 1.6033-2 and Lutheran Social Services of Minnesota v. United States, 758 F2d 1283 (CA8 1985)). This is true even when an auxiliary of a religious organization receives federal funds. We believe any nonprofit that receives federal funds should be required to file Form 990, and that S. 1924 should contain a provision that states such a requirement. Second, key requirements of OMB Circular A-122, Cost Principles for Non-Profit Organizations, should be codified. These cost principles are general rules that govern whether the government will pay for selected items of cost incurred by nonprofit grantees. Some of these provisions help to reinforce the separation of church and state in the conduct of government services, protect against anti-discrimination policies, and are enforceable through government audits.
• The bill should be clear that federal funds cannot be used to discriminate in employing individuals on the basis of religious belief - As Representatives Barney Frank, Chet Edwards, and Robert Scott have noted in a letter to you, your bill "still falls somewhat short of the principle of not allowing unjust discrimination - the issue of faith-based groups which receive federal funds for secular purposes choosing to hire only members of their own religion in carrying out the programs thus funded." Last summer the Justice Department made clear its interpretation of law in a memorandum dated June 26, 2001: "We conclude, for the reasons set forth more fully below, that an FBO receiving direct federal aid may make employment decisions on the basis of religion without running afoul of the Establishment Clause, and that an FBO organized under section 501(c)(3) may invoke the title VII exemption and staff on a religious basis." We urge you to incorporate language in your bill to make clear that federal funds cannot be used to discriminate in hiring individuals on the basis of religion. Reps. Frank, Edwards, and Scott suggest using language similar to 42 USC Sec. 12635(c) or 42 USC Sec. 5057(c) that deal with volunteer programs. We concur.
• Revise eligibility for the Compassion Capital Fund to be more inclusive - We are concerned that the criteria for the Compassion Capital Fund will have a divisive effect on the nonprofit sector, since eligibility is so strictly limited. Greater flexibility would allow the program to focus on the capacity building activities proposed, rather than the size of an organization's budget or staff. For example, a community-based organization may act as a fiscal agent for other groups in order to receive a grant. As a result, its budget will be increased, even though the funds are passed through to other groups as sub-grants. This kind of arrangement, which assists small groups that have not gone through all the formal steps necessary to qualify for direct grants, should not result in disqualifying a group from the Compassion Capital Fund. Additionally, we are concerned that the Compassion Capital Fund will only be available to those who provide social services, as defined by your bill. This creates a special status for certain types of nonprofits, and ignores the positive force of community and faith-based organizations in identifying and promoting long term solutions to problems. The CCF criteria should be broad enough to include groups engaged in these types of activities.
• Clarify the EZ Pass recognition for Section 501(c)(3) status - While this section encourages religious congregations that want to seek federal funding to form separate 501(c)(3) entities, we believe there are better ways to achieve this goal. As written Title IV has the potential to unnecessarily create a favored class of charity, which would not be a healthy development for the nonprofit sector. Many new organizations are engaged in important work that does not involve applying for federal grants or direct social services. The federal government could avoid discrimination against these charities by simplifying IRS Form 1023, which is used to apply for 501(c)(3) tax-exempt status, for all applicants, so that it is more self-explanatory. A more understandable form would lead to more complete and accurate applications, reducing the need for IRS follow up questions and the delays they involve. As mentioned we endorse the notion that federal agencies should be 501(c)(3) organizations that have to provide annual public disclosure. However, federal agencies need not require an IRS 501(c)(3) determination letter for organizations that have applied for 501(c)(3) recognition. Instead, agencies could rely on the applications (Form 1023), with determination letters provided at a later time. Then the EZ Pass process would not be needed. Allowing groups that have applied for 501(c)(3) status to apply for grants would be consistent with existing law. It is not necessary for a charitable organization to have received its formal recognition letter from the IRS before beginning operations, including applying for grants. Current regulations allow a charity to apply for recognition within 15 months of incorporation, and the eventual recognition will date back to the date of incorporation. When the new organization receives its determination letter from the IRS recognizing it as exempt under 501(c)(3) it generally will be an "advance ruling". This means that in five years time the IRS will review the financial statements and activities of an organization to ensure that its activities and expenditures are consistent with charitable, educational or scientific purposes. Your bill adequately addresses the user fee barrier for social service organizations, but the waiver should be available to all organizations that meet the financial criteria in Section 401(b).
• Clarify that the remaining excise tax collected from foundations should be used for improved accountability and research - Historically the excise tax collected from private foundations was supposed to be used for improved enforcement in the tax exempt division of the IRS. Unfortunately, the tax has not been used in this manner. It would be helpful for the bill to clarify that the money collected through the excise tax should be used by the IRS to improve nonprofit accountability and support research on the sector.

Provision that We Oppose While we support the principle of providing taxpayers who do not itemize an opportunity to deduct charitable contributions, we do not support the $400 per person non-itemizer charitable deduction in S. 1924. We do not believe the capped non-itemizer charitable deduction is efficient or effective in generating new charitable giving. Additionally, the capped non-itemizer deduction is not likely to generate significant resources for organizations and programs serving low-income and other disadvantaged individuals and families, which is a high priority for OMB Watch. Finally, we believe the $400 per person non-itemizer deduction to be too costly to the Treasury for the return that is generated. Here are three options we might find acceptable:

• Revise the non-itemizer deduction to have either a floor, such as the proposal by President Clinton that the deduction begins after the first $500 in charitable contributions, or makes the floor moveable to the level of the individual's income, or raises the ceiling and allow only a partial deduction, such as was done from 1981 to 1985. We believe these types of proposals, or variations on them, may be able to hold down costs and increase the likelihood of larger new charitable giving. However, in this current budget environment where increased tax cuts translate into domestic spending cuts, we remain cautious about these approaches at this time.
• Direct funds that would have been spent on the tax cut to spending programs aimed at the same objectives of providing support to nonprofit organizations. This has the added advantage of allowing Congress to regulate how much would be spent in any given year, which the tax provision does not permit.
• Drop the capped non-itemizer deduction from the bill. If either of the top two approaches cannot be achieved, then we would suggest that resources should be saved, and the non-itemizer deduction should be dropped from the bill and reconsidered at a later time.

According to a March 13, 2002 "Economic Analysis of the Charitable Contribution Deduction for Non-Itemizers" by Jane G. Gravelle of the Congressional Research Service, the $400 per person non-itemizer deduction in S. 1924 will generate roughly 12¢ of new charitable giving for every $1 of lost revenue for the government. While that is superior to H.R. 7, it, nonetheless, falls far short of expectations. The CRS analysis also notes that S. 1924 would create "an induced giving outside of religious [sacramental] services of 6 cents per dollar of revenue lost." (page 11) CRS concludes: "By any of the measures, very little induced giving occurs as a result of the capped nonitemizer deduction in H.R. 7 or even in S. 1294." Yet the capped nonitemizer deduction in S. 1924 is likely to cost more than $4 billion per year. According to the Senate Budget Committee, under the President's budget proposals domestic programs, other than homeland security, would be cut 6.2 percent next year, with continued cuts over the next decade. This $4 billion could be used to offset the proposed cuts. Last year's $1.3 trillion tax cut, coupled with congressional determination to keep the budget in balance, means that hard choices must be made. Additional tax cuts, such as recently enacted in the economic stimulus bill and future revisions of the individual AMT, will put even greater pressure on domestic spending. As long as Congress opposes deficit spending, tax cuts will translate into domestic spending cuts, which we generally oppose. Unless Congress is willing to delay the tax cuts enacted last summer, which we would strongly support, the non-itemizer deduction simply costs too much. The CRS analysis also assesses the impact of a nonitemizer charitable deduction with a $500 floor. They note that giving per dollar lost to the government is more than five times greater than S. 1924 - 64 cents of giving for every dollar lost to the government (32 cents if religious sacramental services are excluded). They also demonstrate that the tax cut becomes more efficient and fairer to individuals in lower income brackets by creating a floor as a percentage of income. A March 18 Joint Committee on Taxation (JCT) report, "Description of Revenue Provisions Contained in the President's Fiscal Year 2003 Budget Proposal," provides a review of the President's plan for the non-itemizer deduction. JCT notes: "In addition, the [President's] proposal, like any other 'non-itemizer' deduction, would undermine the purpose of the standard deduction, which exists in part to relieve taxpayers with small deductions from the burdens of itemization and substantiation. One motivation behind the substantial increase in the standard deduction in the Tax Reform Act of 1986 was that '[t]axpayers who will use the standard deduction rather than itemize their deductions will be freed from much of the record keeping, paperwork, and computations that were required under prior law.'" (Quoting from JCS-10-87, May 4, 1987, page 11) This comment suggests that any non-itemizer deduction would be inequitable since when the standard deduction was increased in 1986 it was intended to account for charitable contributions made by those who do not itemize their taxes. OMB Watch would concur with JCT if our primary interest in the non-itemizer deduction revolved around tax equity. Instead, our primary interests in the non-itemizer deduction are in increasing new charitable giving, making it easier for low and moderate income individuals and families to give, and targeting such giving to pursuit of social and economic justice. OMB Watch believes it is still possible to develop a proposal for the nonitemizer deduction that we could embrace even if it cannot be done now because of the cost involved. Conclusion We look forward to working with you to improve the CARE Act as it moves forward. Thank you for considering our comments. Sincerely, signed Gary D. Bass Executive Director CC: Sen. Max Baucus Sen. Charles Grassely