Mormons and H.R. 1

On Thursday, the House released H.R. 1, its fundamental tax reform bill. (It also released an 82-page summary of the 400+-page bill, and a 300-page JCT report on the bill.)

Now, the bill that has been presented isn’t the law that will be enacted (if any is enacted); the House is scheduled to start marking the bill up today. Still, it presents a view of the House Republicans’ vision for tax reform. I wanted to highlight three provisions that would directly impact the church and Mormons as a result of their religious practices.

Doubled Standard Deduction

The bill would double the standard deduction to an inflation-adjusted $24,400 for married taxpayers filing jointly. How would this affect Mormons and the church?

It reduces the economic incentive (and the tax savings) for tithepayers. See, while it continues to allow a deduction for charitable donations, the charitable deduction is an itemized deduction. And taxpayers have to choose between the standard deduction and itemized deductions. Taxpayers generally only itemize where the value of their itemized deductions exceeds the value of the standard deduction.

At the same time it doubles the standard deduction, the bill eliminates all but three itemized deductions. All that’s left is the charitable deduction, the mortgage interest deduction, and a deduction for property taxes (which is capped at $10,000 a year). To itemize, then, and be able to deduct tithing and other offerings, a taxpayer would have to have more than $24,400 in charitable contributions, mortgage interest, and property taxes.

Under current law, only about 1/3 of taxpayers itemize. I don’t know what proportion of taxpayers would with the expanded standard deduction, but I suspect it would be far fewer.

Does that matter, though? You may argue that taxpayers will be better off, since they’ll have a much larger amount free from taxes, and that may be true. But charitable giving is elastic; one estimate found that the increased standard deduction would lead to 28 million fewer itemizers, and up to $13 billion less in charitable giving.

And how does that affect the church? It’s unclear; what is clear, though, is that church leaders support a robust deduction for charitable giving. Limiting that deduction would likely reduce the church’s revenue; its impairment would, according to Elder Oaks, “pose[] a question about the nature and future of America.”[fn1]

Politics From the Pulpit

The bill would modify the so-called Johnson Amendment that prevents churches (and other tax-exempt organizations) from supporting or opposing candidates for office.

It wouldn’t fully eliminate it; instead, it provides that churches and their integrated auxiliaries wouldn’t be deemed to have supported or opposed a candidate for office as a result of any “homily, sermon, teaching, dialectic, or other presentation made during religious services or gatherings.” For this exception to the general rule to apply, the statement would have to be in the ordinary course of the church’s regular and customary activities, and couldn’t cause the church to incur more than a de minimis additional expense in doing so.

Leaving aside the question of the importance or the constitutionality of this change, what would it mean for Mormonism? Possibly nothing; the prohibition is nearly never enforced against churches, and our church’s neutrality statement instructs church leaders to avoid doing things that would risk violating the rule, and the church has previously announced that loosening the restriction wouldn’t affect that policy.

But it does mean that your bishop or stake president could theoretically get up on a Sunday and endorse candidate Joe Biden; it could also mean that a General Authority could endorse candidate Mike Pence at Conference.

Pay Limits

Okay, so this one almost certainly doesn’t affect the church. The law would impose an excise tax on tax-exempt organizations that pay employees more than $1 million. Tax-exempt organizations would owe a 20% tax on salaries in excess of that $1 million ceiling.

There’s no reason to believe that provision is aimed at churches (my first thought was college football coaches), but it doesn’t exempt churches from its coverage.

Family Values

Okay, this is a fourth thing, and I’m not going to go into detail, except to say that the changes are tremendously unfavorable to families. It eliminates deductions for adoption, it replaces personal exemptions with tax credits that disappear after five years, etc. (My friend, colleague, and coblogger Francine Lipman runs the family provisions down in more detail here.)


[fn1] It’s also worth noting that the plan would phase out, then eliminate, the estate tax, which is another significant incentive toward charitable giving.

Comments

  1. Thanks for the introductory run-down and the links.

    “…it does mean that your bishop or stake president could theoretically get up on a Sunday and endorse [a] candidate ….” Of course, it also means that you could theoretically get up to the pulpit in fast & testimony meeting and denounce the bishop’s or stake president’s endorsement and make a contrary one of your own. In some cases that could make the meeting more interesting, but I’m having trouble imagining a testimony that “I know H.R. 1 is true.”

  2. Under current law, only about 1/3 of taxpayers itemize. I don’t know what proportion of taxpayers would with the expanded standard deduction, but I suspect it would be far fewer.

    So do these guys:

    Table 1 shows the percentage of taxpayers claiming the mortgage interest and charitable contribution deductions under current law and under the Trump plan. The proportion of single taxpayers claiming the mortgage interest deduction decreases from 13% to 3%, and the proportion of joint filers benefitting from the mortgage break falls from 42% to 6%. Our results for the charitable contribution deduction are similar: the proportion of single taxpayers claiming the charitable contribution deduction decreases from 14% to 3%, and the proportion of joint filers claiming the deduction declines from 41% to 6%.

  3. Not a Cougar says:

    Sam, I’m not (and I don’t think you are) an economist, but what, if any, trickle down effects will this have on the U.S. economy? From what little I’ve read, the literature on trickle down economics (or voodoo economics as some prefer) is mixed at best. Would the rich have any incentive to reinvest this in job-producing ventures or is this simply a cash grab?

  4. Not a Cougar says:

    JR, I wanna be a visitor in that ward on that Sunday. I’ll bring popcorn.

  5. JR, that’s true. Although you could denounce Biden or Pence at F&T meeting (provided you’re not the bishop or another person who can speak for the church) without risking the church’s tax exemption under current law. (And it’s not 100% clear that a ward bishop’s speech would rise to the level of the church making a statement, but at the very least, there’s a not-frivolous argument that it could).

    Not a Cougar, I’m not an economist, but my lay reaction (based on the reading I’ve done) is that there could be some trickle-down benefit. Maybe. But the time horizon to realize that benefit would be long, assuming it came at all, and the predictions of an additional $4,000-$9,000 per household are rosy enough as to constitute wishful thinking.

  6. Last Lemming says:

    It’s worth noting that because of their tithe-paying, Mormons are significantly much more likely than the average American to find themselves among the ranks of the itemizers if this is enacted. That means that the elimination of the state and local income tax deduction will be felt by Utah Mormons more than by other red-state voters, even though Utah’s taxes are not particularly high. (It’s much worse for California Mormons.)

    Also the loss of personal exemptions is going to be a big deal for itemizers. Again, Mormons’ propensity to itemize works against them here. People who benefit from the expanded standard deduction might not feel any pinch from the loss of the personal exemptions, but people who continue to itemize will. For children, a $4,050 deduction will be replaced by an additional $600 credit. Any itemizer currently in the 25% bracket or higher will lose at least $400 per child. For taxpayers and nonchild dependents, the $4,050 deduction will be replaced by a $300 credit, and that goes away after a few years.

    As for the rest of the “family values” stuff, Francine Lipman’s explanation is accurate, but a bit overheated in places, especially with regard to the higher education stuff. There is so much redundancy under current law, it’s very hard to figure out how much any taxpayer would lose out, if at all. Eliminating the redundancy is one of the better features of the proposal.

  7. I suspect that there will be a lot more people benefiting from the increased standard deduction than are hurt by it? Although there might be less itemization, wouldn’t the increased standard exceed what a number of smaller (newer?) families now can claim using both lower standard deduction plus itemizations? However, I’m no economist or tax specialist, so ….

  8. Eileen, as Last Lemming explains above, the more children a family has, the worse it fares. The doubled standard deduction exempts roughly the same amount of money that the current standard deduction plus personal exemptions for the spouses exempts. There is a tax credit for children, but that tax credit may not reduce taxes by the same amount as personal exemptions do and, in any event, goes away after five years. So the more children you have, the less the doubled standard deduction helps you.

  9. As a California Mormon with four kids, this is a lose lose lose on all fronts for me. Perhaps I’m being targeted for voting for the other gal….

  10. Not a Cougar says:

    Chadwick, more like Trump trying to enact rich people’ s moonshot to save millions in tax planning to avoid the estate tax. This isn’t the first time they’ve tried.

  11. Paul Ritchey says:

    Thanks, Sam, for the thorough look at the proposal. After looking at a few different sources (elected representatives’ websites, media coverage, other blogs) I’ve yet to see a description that gets into the specifics of the proposal. As one who does his own taxes (without Turbotax), I really can’t have an opinion on the bill until I see how all the parts fit together, and ultimately tumble out into a number. Perhaps I (as a self-preparer) am in the vast minority on that front, though.

  12. Geoff - Aus says:

    I assume you are getting the news on the “Paradise papers”? If the rich put the extra money they get in tax havens, it is not likely to trickle down from there. If you have that mentality (many US corporations seem to) then you are not likely to let it trickle down. So no trickle down economics just an excuse for welfare for rich.

  13. “But it does mean that your bishop or stake president could theoretically get up on a Sunday and endorse candidate Joe Biden; it could also mean that a General Authority could endorse candidate Mike Pence at Conference.”

    They could always do that, theoretically or otherwise. The question was whether they could do it without punishment and investigation from the central government.

    Clearly, it’s a better thing to not have that government so deeply involved in the regulations of political speech that pastors have to hold back their opinions.

    It’s one thing to say you shouldn’t do this because of favorable tax treatment. It’s another to organize an investigative department to carry that out. It’s weaponizing of government against the citizens.

    Sadly too many are short sightedly in favor of this.

  14. The tax proposal seems to leave the QCD (qualified charitable distribution) intact. People (over age 70.5) who are taking mandatory required minimum distributions from IRAs can transfer the distribution directly to a qualified charitable organization and then exclude the distribution from income. This has the effect of making that donation/distribution 100% tax deductible whether or not the donee itemizes. QCDs are no-brainers for people who must take distributions and who want to donate, and certainly will become much more popular if the tax proposal passes. However the Church makes these donations hard to do, especially since the eligible people are often not computer-savvy.
    The Church needs to get a better system in place for accepting QCDs!!

  15. There are more than trickle-down effects that can be appreciated here. The increased standard deduction is a big benefit to people with incomes on the lower end of the taxpaying spectrum. It also lessens the (unfair, in my opinion) tax-divide between renters and homeowners.

    In regards to charitable donations, it should be emphasized that if you are a tithepayer who is planning to donate regardless of the tax situation, you are not hurt by this bill. You will either itemize and get a portion of your donation back as always, or might now be able to claim a higher standard deduction and get even more back. The only “downside” is that you might not be getting a tax leg up on non-tithepayers anymore.

    I’m also suspicious of how much the standard deduction part of this bill (not talking about the estate tax portion) would affect other charitable donations. The dividing line between saving taxes or not from donations was always there. This bill just moves that line up the income spectrum (specifically to people with costlier houses–but generally higher-income people). Admittedly that eliminates the tax incentive to donate for a lot of people. I’m wondering if donations are equally elastic at all income levels though. It seems to me that donations at lower income levels are more frequently to churches and local charities that people feel compelled to donate to regardless of the tax benefit. And this bill might actually increase the incentive for people who itemize since charitable donations would now be one of only three ways to increase the deduction.

  16. You can’t really talk about the increase in the standard deduction without also looking at the complete loss of personal exemptions. Under the current law, for a family of four that uses the standard deduction, the total reduction in taxable income from the SD and the personal exemptions is $28,900. Under the new law, that would be $24,000. If you itemize, like I do, and your itemized deductions fall between $12,700 and $24,000, your total SD and PE under the current law would likely be more than $30,000, perhaps as much as $40,000. So, under the new law, you would end up with $5,000 to $16,000 of extra taxable income. The reduction in tax brackets and the general shift upward of those brackets would not be enough to offset these losses, so you will end up owing more taxes than under the present system.

    I’m not saying this is a bad thing. Personally, I believe we need tax increases, not tax cuts, to pay down our national debt. But those tax increases should fall on the upper middle class and, especially, the very wealthy. Taxes for the poorer sectors of society should decrease. But this is anathema to Republicans. What this whole charade is really about, which you can see if you simply look at the details, is a massive tax giveaway to the wealthy and a huge increase in the federal debt. This is Republican politics, shorn of its lies and half-truths. If you don’t believe this, bone up on your arithmetic and get informed about the details.

  17. Wally – It’s a little more complicated than that. The personal exemption would be replaced (or at least partially replaced) with credits. The child tax credit would be increased by $600. In addition, a family flexibility credit of $300 would be available for each taxpayer, spouse, and non-child dependent. The $300 family flexibility credit would be set to expire on 1/1/2023. The $600 increase in the child tax credit would not expire.

  18. This tax bill would make it harder for an enterprising young Mormon family with four kids to live in an expensive job center (Boston, Washington DC, California, etc.) for several reasons:

    1. The standard deduction increase benefits everyone, but the personal exemption loss hurts the four-child family much more than it hurts smaller households. So in competing for real estate, it puts the four-child family at a significant comparative disadvantage. (The child tax credit only compensates for a fraction of this effect.)

    2. The mortgage deduction change particularly hurts the young four-child family, because they are more likely than others their age to need a large mortgage.

    3. The loss of SALT exemptions hurts everyone, but especially cash-strapped families trying to live in high income tax areas.

    Combine these factors, and you may find a lot more young Mormon families staying in (or moving back to) smaller towns in Utah or other less expensive states. Is that a bad thing? Well, maybe not for everybody. But personally, I think it is nice for large Mormon families to have a presence in the nation’s large metropolitan areas (and to work in some of the interesting industries centered there) and I will be sorry if the next generation of large Mormon families doesn’t get to be part of that to the same extent.

  19. There likely is significant trickle down coming from this tax proposal. This is diffuse over time and income, so it is not as easy to quantify as other effects can be.
    For larger Mormon families, the reduction in tax benefits for children at middle income levels is a significant hit. Plenty of single income households with children fall in this category. The elimination of state and local tax deduction is just an elimination of the tax subsidy that high tax locales currently get. Yes, this is paid by individuals, but the benefit is to most tax payers in the high tax cities and states. Take subsidy money away from blue states, a clear republican target.

  20. The real change will be in the cost of real estate. Home prices could only go as high as they have because the interest rates have been kept so low by the federal government’s monetary policies. If people in some of the high tax states, such as California, can no longer deduct their state income taxes, and can only deduct a portion of their real estate taxes, the people will no longer be able to afford the high house payments. The result will be either a slowing in the rise of prices or an actual fall in housing prices. A welcome relief for many trying to purchase a home there.

  21. The effect on CA real estate prices will not be as large as you think, because it is only a segment of the market for whom home ownership is being made more expensive. (The bill will have a relatively lower impact on people who are mostly paying in cash, people who are not currently earning salaries, people who don’t have children, wealthy Chinese buying investment homes, or people who have owned homes for a long time and thus — due to CA property tax quirks — pay very little in property tax).

    The primary effect of the tax change is to transfer money from the salary-earning, mortgage-paying class (disproportionately young blue state professionals) to the shareholding, business-owing class (disproportionately older blue state shareholders).

    Secondarily, but also importantly…. a large fraction of the benefits will also benefit shareholders overseas, and a large fraction of the cost will also be paid by unspecified Americans of the next generation.

  22. Do you have any numbers of the percentage of people who are paying cash for their homes or buying homes from foreign wealth bought into the U.S. or buying homes without earned income. It seems to me to be a small, small percentage. But I would love to know the actual percentages.
    I personally am in favor of eliminating the interest deductions on homes over $500,000. I do not think we need to subsidize wealthy home owners with big tax breaks. As a renter in northern California, I would love to see a bill that helps moderate the rise in home prices. I think this will do that.

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