Nonprofits kept under fire in Senate GOP tax plan

University of Pennsylvania president Amy Gutmann is among the region’s nonprofit executives whose pay would be taxed under proposals being considered in Congress. Here, on Nov. 1, she announced a three-year renovation of the Penn Museum.

The nonprofit sector, a major force in the Philadelphia region with its abundance of universities and health-care systems, got little relief in the Senate GOP plan scheduled for debate Monday in the Committee on Finance.

Like the House bill, the Senate 253-page outline released late Thursday by Sen. Orrin Hatch (R.,Utah), chairman of the Senate Finance Committee, goes after nonprofit pay, endowment income at the nation’s wealthiest universities, and tax-exempt bonds used by nonprofits such as the University of Pennsylvania to finance their operations.

Under both proposals, nonprofit employers, including the universities such as Pennsylvania State University that pay football coaches more than $5 million a year, would have to pay a 20 percent excise tax on the portion of that pay over $1 million for their five highest-paid employees. In the Philadelphia region, this provision would capture not just high-paid executives such as Amy Gutmann, president of the University of Pennsylvania, whose pay totaled $3.5 million in 2015, but also many doctors who work for nonprofit health systems.

The nonprofit excess compensation tax is expected to raise $3.6 billion over 10 years, according to the Joint Committee on Taxation.

The Senate plan to tax income from university endowments differs from the House proposal in that the Senate would limit the tax to endowments valued at at least $250,000 a student, compared with $100,000 a student in the House bill. That means the Senate plan would affect about 60 colleges and universities, rather than 140 or so in the House plan, according to an analysis by the Chronicle of Higher Education.

The House version would bring in $3 billion over 10 years. The higher threshold of the Senate version would cut that to $2.5 billion.

The Senate outline preserves private-activity bonds that would be eliminated by the House. They are issued through a government authority, such as the Philadelphia Authority for Industrial Development, but are widely used by tax-exempt entities to pay for housing, senior communities, hospitals, and buildings on college campuses.

The benefit of such bonds is that investors do not have to pay income tax on the interest, which allows the borrowers to pay lower interest rates. Eliminating them after this year, as the House would do, is projected to add $38.9 billion to federal coffers over 10 years.

However, both the House and the Senate would repeal advance-refunding bonds, which are a refinancing mechanism that allows universities, health systems, and other borrowers to take advantage of a fall in interest rates even if the previously issued bond cannot yet be paid off under contract terms.

Repealing that type of municipal bond would save the government about $17 billion over 10 years.

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