Policy

New Excise Tax Targets Big-Money Nonprofit Executives

But K Street isn’t pushing hard to remove proposal

Association lobbyists on K Street could be hit by a 20 percent excise tax on seven-figure compensation packages under the GOP tax overhaul. (Bill Clark/CQ Roll Call file photo)

Many of K Street’s highest-paid association lobbyists are pushing for the first major tax overhaul in 30 years, but a discrete provision in the sweeping measure may have an adverse consequence for their bottom lines.

Lawmakers have crafted a new 20 percent excise tax on seven-figure compensation packages at all tax-exempt organizations, including trade associations, foundations, universities and hospital systems. The new tax is in both the House-passed bill and the Senate draft, making it likely to remain if the overhaul becomes law.

The proposed tax, applied to compensation packages in excess of $1 million, would ripple through K Street’s biggest associations, which would need to pony up more money to keep top talent. Despite that, few lobbyists are mounting a campaign to remove the proposal.

Even a group that lobbies for association executives said that although it is monitoring the provision, it sees more pressing matters in the bill.

“We think that it’s not a good idea,” said Jim Clarke, senior vice president of public policy for the American Society of Association Executives. “For those groups that are very competitive with their counterparts, it just seems like it doesn’t make sense.”

Still, the ASAE is focused more on such tax issues as proposals governing deferred compensation and royalties at nonprofit organizations, he said.  

Watch: Protesters Chant ‘Kill the Bill’ as Tax Overhaul Advances From Senate Committee

Though associations are often viewed as the lower-paying segment of K Street, behind corporate in-house gigs and lobbying firms, the top salaries at the biggest trade groups pay millions and attract some of the best-known denizens of K Street, including former administration officials and ex-members of Congress.

Thomas Donohue, president of the U.S. Chamber of Commerce, has been a forceful advocate of the tax overhaul. But his $6 million reported annual compensation could mean a roughly $1 million tax paid by the group. A chamber spokesperson did not provide a comment, and neither did one for the American Petroleum Institute, where CEO Jack Gerard earns about $5 million in compensation, according to tax forms. They are among the highest-paid association executives in Washington, according to a survey by CEO Update.

The proposal wouldn’t stop at the top executive, either. The provision in the House bill and Senate version would apply to the top five highest-paid executives of a tax-exempt organization if each makes more than $1 million. The tax also would apply to the cash value of most benefits, according to the Senate draft.  The Joint Committee on Taxation estimates the provision would raise $3.6 billion over 10 years. 

Attracting talent

K Street recruiters say most groups would opt to pony up to pay the tax rather than cut their top executives’ pay.

“There’s definitely a war for talent within the association world,” said Ivan Adler, a longtime K Street headhunter. “And they’re not going to let compensation get in the way — it’s just too important.”

Adler predicted that associations would increase the dues that member companies pay to cover the new tax bill, or they’d have to cut costs elsewhere.

Tax lobbyist Dawn Levy O’Donnell, who runs the firm D Squared Tax Strategies, represents the ASAE. She noted that lobbying on executive compensation, especially for the tax-exempt sector, is tricky.

“You’re talking about large amounts of money, and it’s a hard conversation to have,” she said. “There is a reason that people do work in the nonprofit world, but they are also in high demand. … You want to be able to attract the most talent that you can.”

Seven-figure packages for university personnel, including coaches with multimillion-dollar annual contracts, as well as for top executives at nonprofit hospital systems and foundations would trigger the tax — which their organizations would need to pay.

“This is going to be a very heavy burden on charitable organizations who are trying to perform their mission,” said Derek Wolman, a partner at the law firm Davidoff Hutcher & Citron who focuses on health law, among other matters. “Executives with skills and management at a university or a hospital are portable to the for-profit sector, so it’s going to be very hard to compete for talent with the for-profit world.”

Levy O’Donnell said associations don’t have stock options like their for-profit counterparts.

“It’s a bitter pill to swallow,” she said. “There are a lot of associations that are bummed out. … In this little world, it’s an issue.” 

But in the grand scheme of the tax package, it just doesn’t resonate as a lobbying priority, she added.

JP Moery, a Chamber of Commerce veteran who runs his own association consultancy, The Moery Company, agreed.

“Their focus is on how their members are being impacted,“ Moery said. “This is a huge opportunity for them, as business associations in general, to really engage on something big.”

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