Lawmakers in Augusta have been debating tweaks to our tax policies for years. In 2013, a $27,500 cap was imposed on all itemized deductions, increasing the financial burden on thousands of Mainers – 31 percent of whom itemize deductions on their tax returns – with sizeable deductions such as mortgage interest, real estate taxes, charitable contributions, business-related expenses, or educational expenses. In 2014, legislators passed bills designed to gradually remove the cap on charitable giving deductions by 2017 and exempt medical expenses from the restriction. Unfortunately, in 2015, during last-minute budget negotiations, the cap on charitable contributions reinstated.
A bill now being considered in the Legislature – LD 1519, sponsored by Matt Pouliot (R-Augusta) – would reverse those harmful limitations and leave millions of dollars in the pockets of hand-working Mainers. Two changes in particular, lifting the cap on mortgage interest and charitable giving deductions, are important to Maine’s economy and middle class.
Mortgage interest deduction
According to the National Association of Realtors, about 67% of owner-occupied homes in Maine had a mortgage in 2009. In 2008, about 163,000 taxpayers in Maine claimed an average deduction for mortgage interest of nearly $10,000. Total tax savings as result of the mortgage interest deduction in 2008 exceeded $400 million.
The Maine Association of Realtors points out that, “The fact that the purchase of a home gives something back to the purchaser in the form of deductions for mortgage interest…is a powerful incentive and makes home ownership an attractive investment. Take that incentive away and what makes an apartment dweller decide to take the plunge into homeownership?”
The importance of homeownership in promoting a strong economy and stable neighborhoods is well-documented. When individuals and families are invested in their homes and communities, educational achievement rises, crime rates decline, and fewer people rely on public assistance and government benefits. In 2013, U.S. News and World Report noted that, “Ownership means the residents of a neighborhood gain an additional reason to care about its future – the financial value of their investment.” As a result, “homeowners are more likely to use their scarce time and resources to improve their community. And this results in more civic engagement, more volunteerism and other socially desirable outcomes.”
A recent article in USA Today emphasizes that, “The [mortgage interest deduction] has played a key role in the U.S. housing industry for more than 100 years, and continues to serve as a great incentive for first-time homebuyers to fulfill their dream of home ownership.”
Charitable giving deduction
Americans are among the most generous and selfless people in the world. The United States ranked second in the 2015 World Giving Index, and more than 95 percent of American households donated a total of $358 billion to charity in 2014, according to the National Philanthropic Trust.
More than 17,700 nonprofit organizations operate in Maine – one of the highest numbers of charities per capita in the United States. High levels of poverty, failing schools, and a weak economy have led thousands of Mainers to rely on charitable institutions for food, educational opportunities, and shelter.
According to a recent study, nonprofits employ 1 in 7 workers in Maine, contribute $10 billion per year to the economy through wages, sales, and professional services, and mobilize 350,000 volunteers each year to improve communities and help those in need.
When a cap on charitable giving deductions was put in place in 2013, a coalition of nonprofit groups immediately began urging lawmakers to repeal the cap, warning that penalizing wealthy donors for their generosity would undermine nonprofits’ efforts to serve the people of Maine. They were right – after a sharp decline in charitable giving from 2006 to 2012, the policy caused Maine nonprofits to lose an additional $20 million annually.
According to the National Council of Nonprofits, “Limitations on state charitable deductions and other giving incentives effectively remove motivations for donations to churches and synagogues, domestic violence shelters, early childhood programs, food banks, school alumni groups, and all other charitable nonprofits, and…further reduce the ability of charitable organizations to meet the increasing need for services in their communities.”
Maine isn’t the first state to impose a cap on charitable giving deductions. A few years ago, lawmakers in Hawaii and Michigan – in an effort to mitigate severe state deficits – decided to repeal tax credits for donations to food banks, homeless shelters, and community foundations. The adverse effects of the policy were immediately felt, and the caps were quickly lifted. Other states that have enacted tax reforms – including North Carolina, Kansas, and Montana – have expressly exempted charitable donation from deduction limits. Maine politicians should learn the lessons of other states and recognize that raising revenue on the backs of nonprofit organizations is a mistake.