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NONPROFIT POLICY UPDATES
June 21, 2024
In this week's issue...
State legislators pulled out their calendars this week and discovered that the state’s new fiscal year starts in less than two weeks. After discovering this shocking chronological truth, both the House and Senate quickly released (and the House approved) their proposals for state budget adjustments for the new fiscal year. This week’s Nonprofit Policy Update provides an analysis of key nonprofit provisions in both chambers’ budget proposals and the likelihood of a budget passing next week (spoiler alert: It won’t!). We also share details of three new state constitutional amendments that could be on the ballot this fall, a reminder that the first phase of the DOL overtime rule takes effect in 10 days, and information about several other bills moving through the state legislature that could affect nonprofits.
NC House Approves State Budget Adjustments
Yesterday, the NC House of Representatives gave final approval to proposed adjustments to the state budget for FY 2024-25 (H.B. 263).
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Partial funding to ease the looming “child care cliff” when temporary federal funding for child care providers goes away on July 1. The forthcoming drop in funding for child care programs could affect nonprofits as both service providers (since many child care providers are nonprofits) and employers (since many nonprofit staff need reliable child care to be available to work). The House budget provides about $135 million in child care stabilization grants, which would provide about nine months of temporary funding to cover the loss of federal funds for child care providers. The House budget also would make a variety of changes to child care regulations that advocates fear could hurt the quality and safety of child care programs across the state.
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Funding for the 54,000 families that are currently on the waitlist for the Opportunity Scholarship program. Last year, legislators greatly expanded eligibility for this voucher program for families with students attending (mostly nonprofit) private schools. Legislators’ decision on providing funding for families on the waitlist could have significant impacts on enrollment in and finances of nonprofit K-12 schools.
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Very limited additional earmarked appropriations for nonprofits. By the Center’s count, the House budget includes about $13.5 million in new directed grants to 20 nonprofit organizations. More than 600 nonprofits received a total of about $1.5 billion in earmarks in last year’s state budget. The longer legislators wait in finalizing this year’s budget, the more challenging it can be for nonprofits that receive earmarks to account for and spend this state funding.
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A provision that would authorize the NC Department of Insurance to establish and operate a state-run health benefit exchange. In 2013, as the federal government was implementing the Affordable Care Act, the NC General Assembly passed a law (S.4 from 2013) that prohibited North Carolina from forming its own health benefit exchange under the ACA. As a result, North Carolina individuals, nonprofits, and businesses have had to use the federal ACA marketplace to search for, and enroll in, ACA subsidized health insurance plans. In 2013, some health policy analysts suggested that a state-run health benefit exchange could provide better and clearer information to individuals and employers, helping nonprofits, businesses, and individuals find better quality and more affordable options for health insurance. It is unclear whether these potential benefits would still exist today if North Carolina established a state-run health benefits exchange.
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Changes to state raffle laws affecting nonprofits (see a separate item further down in today’s Nonprofit Policy Update for more details).
Details of the House budget were released Monday night, and three House committees approved the bill on Tuesday. The House approved its budget adjustments mostly along party lines (all Republicans and four Democrats votes for the bill) in votes on Wednesday and yesterday.
NC Senate Releases Its Own Proposal for State Budget Adjustments
Before the House held its final vote on the state budget, the NC Senate released its own budget proposal (H.B. 317) on Wednesday evening. The Senate Appropriations Committee approved the bill yesterday morning. The full Senate is scheduled to vote on the budget bill on Monday. The Senate proposal makes far fewer changes than the House budget. On issues of interest to nonprofits, the Senate budget adjustments would:
- Provide similar child care stabilization grants (covering about nine months of service) as those in the House proposal. The Senate proposal does not make other regulatory changes affecting child care providers.
- Provide funding for families on the waitlist for Opportunity Scholarships.
- Make no new directed grants to nonprofits.
- Make no changes to raffle laws.
Unlike the House budget, the Senate budget does not include additional raises for state employees or for public school teachers beyond the pay increases that were already approved last October.
Final Budget Not Expected to Pass (at Least Immediately)
While both the NC House and NC Senate released their proposals for adjustments to the state budget this week, the two versions have enough differences – most notably on pay increases for state employees and public school teachers – that legislators won’t have a final budget in place next week. After next Friday, neither chamber is planning to conduct votes again until at least August or September, so the current state budget (H.B. 259) will remain in place until at least later this summer. For a refresher on the current state budget, check out the Center’s analysis of key nonprofit appropriations and provisions. It is unclear what immediate impact the lack of a revised state budget will have on child care providers and on other state programs.
NC Senate Proposed Three Constitutional Amendments
Yesterday, the NC Senate Elections and Redistricting Committee released and passed a bill (S.630) that would place three constitutional amendments on the November 2024 ballot:
- A provision clarifying that only U.S. citizens may vote in North Carolina elections. While the bill would change the wording of the state constitution, it does not appear to make any substantive changes, since the constitution already prohibits non-citizens from voting.
- A provision requiring photo ID for all forms of voting in elections. Currently, the state constitution only requires photo ID for in-person voting. Effectively, this amendment would mean that voters would need to present a photo ID when voting by mail.
- A provision lowering the cap on the state income tax rate from 7% to 5%. The current individual income tax rate is 4.5%, and the current corporate income tax rate is 2.5%. Lowering the cap on the income tax rate in the state constitution could create fiscal challenges for the state in the future. See the next item for more details about why this could be problematic for nonprofits.
To become a part of the state constitution, 60% of members of both the NC Senate and NC House of Representatives would need to approve the amendments and then a majority of voters would need to vote in favor of it in this fall’s election. Because voters ultimately determine whether to make constitutional amendments, legislation proposing constitutional amendments does not require the Governor’s approval. The Senate and House are likely to vote on the bill next week.
It is likely that at least the citizens-only voting and the photo ID amendments will pass next week and be on the ballot this fall. It is unclear whether the income tax cap amendment will also pass. While the Senate is expected to approve the three amendments (likely in a party-line vote), it is unclear whether there is sufficient support for the income tax cap to pass in the House.
Lowering the Income Tax Cap Could Harm Nonprofits
The Center is concerned that the proposed constitutional amendment lowering the constitutional cap on the state income tax rate from 7% to 5% could be harmful to nonprofits. While the 5% cap is lower than the current individual and corporate income tax rates, the individual income tax rate has historically been higher than 5%, and it was 5.25% as recently as 2021. Because income tax rates below 5% are new to North Carolina, it remains unclear how these lower rates will affect long-term revenue for the state, particularly during or after an economic recession. With a 5% income tax cap, future state legislators will have limited ability to raise needed revenue from income taxes (even temporary tax increases on high-income North Carolinians). This is likely to create pressure to increase revenue from sales tax, property taxes, and governmental fees and to cut state government spending.
Ultimately, a lower income tax cap would increase the likelihood of future legislative challenges to nonprofit sales tax refunds, property tax exemption, and state income tax exemption. It also could lead to significant cuts to state grants and contracts with nonprofits that provide public services and could create the need for the state and local governments to offload certain programs and services onto the nonprofit sector without compensating nonprofits for the full cost of providing these services.
House Budget Would Allow Nonprofits to Conduct More Raffles
A provision in the House budget would eliminate statutory limits on the number of raffles that charitable nonprofits may conduct each year and on the total value of raffle prizes. Under current law, 501(c)(3) nonprofits many conduct up to five raffles per year, the maximum cash prize for any raffle is $250,000, and nonprofits may raffle real property valued at up to $2.25 million. The House budget provision would allow nonprofits to conduct an unlimited number of raffles every year and would eliminate the caps on the value of cash prizes or real estate offered in raffles.
The Center supports this change since it would enable some nonprofits to raise more revenue by conducting more raffles as fundraising events.
First Phase of DOL Overtime Rule Set to Take Effect on July 1
Nonprofits with salaried employees who earn less than $43,888 per year may need to make changes to their employment practices in the next 10 days to comply with the first phase of the U.S. Department of Labor final rule on overtime pay under the Fair Labor Standards Act (FLSA). The new overtime rule raises the salary threshold for white-collar exemptions from overtime pay requirements in a two-step process:
- The salary threshold goes up from the current level of $35,568 per year to $43,888 per year ($844 per week) on July 1, 2024. This is essentially adjusting the salary threshold from the 2019 rule for inflation since it maintains the current methodology of setting the threshold at the 20th percentile of weekly earnings of full-time non-hourly workers in the lowest-wage Census Region (currently the South).
- The salary threshold then goes up to $58,656 per year ($1,128 per week) on January 1, 2025, which is the 35th percentile of weekly earnings of full-time non-hourly workers in the lowest-wage Census Region (currently the South).
The ultimate fate of the overtime rule could be determined by federal courts later this year. Two lawsuits in a federal court in Texas have challenged the overtime rule, alleging that DOL exceeded its authority in issuing the rule. It is possible that the court could rule on one or both cases challenging the rule this month. DOL is likely to defend the overtime rule in court, so it could take months before nonprofits and others know for certain which, if any, parts of the final rule will ultimately take effect.
In the meantime, the Center continues to hear from (many) nonprofits with questions about how the U.S. Department of Labor final rule on overtime pay under the Fair Labor Standards Act (FLSA) will affect their organizations. To help answer those questions, the Center has offered two resources to help nonprofits better understand this new rule, its potential impact on North Carolina nonprofits, and compliance options for nonprofit organizations:
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An updated analysis of the final overtime rule and its likely impact on North Carolina nonprofits, concluding with 15 compliance options and eight next steps for nonprofits to take now to be ready to adapt to the significantly higher salary threshold in eight months.
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A webinar recording that provides more information on FLSA and the new overtime rule and to answer nonprofits’ questions.
Governor Cooper Vetos Bill on Masks and Campaign Finance Law
This morning, Governor Roy Cooper vetoed a bill (H.B. 237) that would:
- Limit the ability of people to wear masks on public property in North Carolina; and
- Expand the ability of 527 political organizations to make contributions to influence North Carolina elections.
The mask provision in the bill would make it a crime for people to wear facial coverings in public places unless they were wearing a “medical or surgical grade” mask for the purpose of “preventing the spread of contagious disease.” Under the bill, wearing masks for other health-related reasons – such as to avoid allergens, smoke, or air-borne pollutants – would be prohibited. Also, people wearing masks to prevent the spread of contagious disease would still be required to remove their masks temporarily upon the request of law enforcement officers or if the owner or occupant of public or private property requests to see their face for identification purposes. The bill does not specify how long people would be required to remove their masks in these circumstances.
The campaign finance provision in the bill would allow political organizations formed under Section 527 of the Internal Revenue Code to make unlimited campaign contributions to political parties in North Carolina. Notably, the bill would allow 527 political organizations connected with organizations that lobby to make contributions during the legislative session. If the bill becomes law, it could infuse significant new federal money into North Carolina elections. It also could enable 527 organizations affiliated with 501(c)(4)s or for-profit businesses that lobby to make political contributions to legislators while the NC General Assembly is in session, essentially allowing them to spend money to influence legislators’ actions on contentious legislation. This could put 501(c)(3) nonprofits at a competitive disadvantage in legislative advocacy, since charitable nonprofits (rightly) are not permitted to make campaign contributions, either directly or indirectly.
The NC House of Representatives and NC Senate are expected to vote to override his veto next week.
NC House Approves Insurance Legislation That Could Simplify Notice Requirements on Health Plans
Yesterday, the NC House of Representatives unanimously approved a bill (S.319) that makes a variety of changes to state insurance laws. Among other things, the bill would enable nonprofits (and other employers) that offer employer-provided health plans to agree to have all of their employees receive plan documents electronically rather than in hard copies. Individual employees would still have the right to opt out of receiving documents electronically. All electronic transmission of health plan documents would need to be compliance with the Employee Retirement Income Security Act of 1974 (ERISA), the federal law that sets standards for employer-provided health plans, and with the Uniform Electronic Transactions Act (UETA), the state law that governs electronic transactions.
The bill goes to the Senate for final approval. The Senate could vote on it next week.
NC Senate Approves Tax Legislation
Yesterday, the NC Senate gave final, unanimous approval to a bill (H.B. 228) making a wide variety of changes to state tax laws. Most of the provisions of the bill were technical and clarifying changes that should not directly affect charitable nonprofits. Two provisions in the bill could impact some nonprofits:
- The bill would provide for automatic extension of state tax income tax returns when the Internal Revenue Service (IRS) grants an extension of the corresponding federal returns. Under current state law, individuals, businesses, and nonprofits are required to ask the NC Department of Revenue (DOR) for extension of their tax filing deadlines. For nonprofits that have unrelated business income and file Form 990-T with the IRS, this change would mean that any extension of their 990-T filing deadline would automatically apply to their state corporate income tax filing.
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The bill would make a slight change in sales tax laws for marketplace facilitators (e.g., Amazon or eBay) that are required to collect and remit sales tax on sales made through their platforms. Nonprofits generally don’t need to collect and remit sales tax on goods and services sold through these marketplace facilitators. The current North Carolina law requires marketplace facilitators to handle sales tax if they have either: (1) $100,000 in gross sales in North Carolina; or (2) more than 200 individual transactions in North Carolina each year. The bill would change this to make the threshold simply $100,000 in gross sales. It is unclear whether this change would affect any marketplace facilitators that nonprofits use for selling goods or services.
Because the Senate made two changes to the House-passed version of the bill, the House will need to vote on it one more time before it goes to Governor Cooper for his consideration.
Conference Committee to Consider Reinstatement of Conservation Tax Credit
Yesterday, the NC Senate unanimously rejected the House-approved 2024 farm bill (S.355). Among other things, the bill would reinstate a state tax credit for contributions of real property for a variety of conservation purposes. A similar tax credit, along with virtually all other state tax credits, was repealed in 2013 as part of the General Assembly’s overhaul of the North Carolina tax code. The change to the tax code in the farm bill could encourage more contributions of land to nonprofits engaged in conservation and historic preservation. It also could signal that state legislators are willing to reconsider other tax credits that were repealed a decade ago, including the state tax credit for charitable contributions for individuals who use the standard deduction. The Center continues to advocate for legislators to reinstate the non-itemizer charitable tax credit, which would provide incentives to hundreds of thousands of North Carolinians to give more generously to support the work of charitable nonprofits.
The bill now goes to a House-Senate conference committee, which will negotiate a final version of the bill. Legislators could vote on the final version as soon as next week.
Nearly 450,000 North Carolinians Have Health Coverage Through Medicaid Expansion
Medicaid expansion began in North Carolina in December. According to the most recent data from the NC Department of Health and Human Services (DHHS), more than 479,000 North Carolinians have enrolled in health care through Medicaid expansion since December, with about 1,000 more people enrolling every day. DHHS estimates that about 120,000 additional North Carolinians may be eligible for coverage under Medicaid expansion. Almost all potential Medicaid expansion enrollees receive services from nonprofits, so it is important for nonprofit organizations to spread the word about Medicaid expansion eligibility and the application process.
DHHS has launched a website to help nonprofits and others with community outreach on Medicaid expansion. The DHHS website includes basic information on eligibility for Medicaid coverage, details of costs and coverage, and free materials to help nonprofits provide clear and accurate information about Medicaid and Medicaid expansion to their clients and communities. Please share this information widely, especially with clients who may now be eligible to apply!
Reminder: Take a Survey to Help Improve Public Service Loan Forgiveness Program Advocacy
The PSLF Coalition, which is leading efforts to simplify and advance student debt relief for nonprofit employees and others, wants to hear from staff working at charitable nonprofits and earning forgiveness under the Public Service Loan Forgiveness (PSLF) program. Take the survey to help inform the coalition’s advocacy for improvements to PSLF.
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