In late June, two U.S. Senators sent a letter to their Senate colleagues proposing what they described as a “blank slate” approach to tax reform—a plan to essentially scrap the current tax code and start from scratch.
And while some have praised the concept as a positive, bipartisan effort, “fraternal benefit societies” fear the move could strip them of their tax-exempt status.
Senator Max Baucus, a Democrat from Montana and chairman of the Senate Finance Committee, and Senator Orrin Hatch, a Republican from Utah and a ranking member of the committee, said they aim to wipe the slate clean and start with a tax code “without all of the special provisions in the form of exclusions, deductions, and credits, and other preferences, that some refer to as ‘tax expenditures.’”
The senators said all special provisions would be taken off the table “unless there is clear evidence that they: 1) help grow the economy, 2) make the tax code fairer, or 3) effectively promote other important policy objectives.”
Such a change would help to reduce the deficit and/or tax rates, they argued. The men asked their fellow senators to provide input on what expenditures meet the criteria and should thus remain exempt—giving them a deadline of July 26 to provide suggestions. Those suggestions would then be considered while the senators craft a tax bill. (To read the senators’ full letter, click here.)
A recent Star Tribune editorial lauded the blank-slate approach as “a worthy idea,” suggesting that it is a viable path to bipartisan reform.
But the approach could have far-reaching effects, and fraternal benefit societies are making a push to ensure that their nonprofit status is retained.
Fraternal benefit societies are groups whose members are connected by a common bond. For Minneapolis-based Thrivent Financial for Lutherans, for example, that bond is religion. Knights of Columbus is another example of a fraternal benefit society.
The organizations typically offer life insurance or other investment products to their members.
Jeff Mitchell, spokesman for the Illinois-based American Fraternal Alliance, said his organization represents 70 fraternal benefit societies, which constitute the “vast majority” of such societies in the country. Those 70 societies represented 7.2 million members in 2011, the latest year for which data is available, and 443,754 of those members are based in Minnesota, he said.
Thrivent Financial is a Fortune 500 company and Minnesota’s second-largest private company based on revenue, which totaled $8.3 billion in 2012. It has roughly 2.5 million members nationwide.
On its website, Thrivent is urging its members to contact their senators and advocate for their cause.
To date, the outreach has led to Thrivent members sending 1,500 messages to 98 senators, according to Thrivent spokesman Brett Weinberg. “This kind of grassroots approach can be impactful,” he said.
Weinberg said that losing its tax-exempt status would have “no impact on Thrivent Financial for Lutherans from a financial strength standpoint,” but “there would be an impact on our ability for us as an organization, through our members and chapters, to serve the community.”
Thrivent’s main entity, Thrivent Financial for Lutherans, focuses on insurance products and is tax-exempt. Essentially, the organization takes the money that it would otherwise pay in taxes and uses it to fund membership programs and services designed to give back to the community. (Thrivent’s subsidiary that deals with mutual funds is not tax-exempt, Weinberg said.)
Thrivent is not alone in its push to retain tax-exempt status. Eivind Heiberg, CEO of Minneapolis-based Sons of Norway, recently wrote a letter asking his organization’s members to contact their senators, as well. Sons of Norway works to promote and preserve Norwegian culture.
Eliminating tax exemption would prove “catastrophic” to fraternal benefit societies, Heiberg wrote. “Without these tax exemptions, fraternal life insurance organizations would no longer be able to provide members with the benefits they have come to enjoy.”
Sons of Norway had nearly 60,000 members, 55,000 of whom live in the United States, at the end of 2012, according to its website. Life insurance is one of the services it offers its members.
A 2010 Georgetown University study found that fraternal benefit societies contribute $3.4 billion annually in “economic value,” which includes the direct impact of volunteering and charitable contributions, as well as “indirect value from improved social capital brought about through the activities of fraternal members.”
In 2012, a House resolution was introduced that aimed to protect fraternal benefits societies’ tax-exempt statuses, although it did not pass.
While Baucus’ and Hatch’s “blank slate” approach does not single out fraternal benefits societies, it makes it clear that major changes to the tax code are being considered. The senators said that the current tax system is “riddled with exclusions, deductions, and credits” that are unfair, inefficient, and are “acting as a brake on our economy.”