April 9, 2009 | Read Time: 3 minutes
A new bill pending in the Senate is designed to simplify the tax code for private foundations and encourage them to give more money to charity as the recession continues.
The bill, S. 676, would change the way foundations pay excise tax on their net investment income.
“By eliminating a simple provision in the law that creates a tax penalty when foundations increase their charitable giving, we can encourage greater foundation philanthropy and expand the reach of the invaluable charitable work they fund,” said Sen. Carl Levin, a Michigan Democrat. Mr. Levin is sponsoring the bill with Sens. Charles E. Schumer, a New York Democrat, and Debbie Stabenow, Democrat of Michigan.
Foundations currently are subject to a tax of 1 or 2 percent. They can qualify for the lower rate in any year in which the percentage of assets they directed toward charitable distributions is larger than the average percentage of their distributions during the previous five years.
“While on its face, this appears to be an incentive to give more (i.e. if the foundation gives more than its average, its tax rate is cut in half), the two-tiered tax actually has the opposite effect,” said a press release from the three senators. “The current tax creates an incentive to never dramatically increase giving in any one year because the increase raises the average-donation calculation going forward.”
“Thus, although intended to reward foundations for giving more by reducing their excise tax rate, the tax code actually deters foundations from one-time increases in charitable giving by punishing the foundation with a higher tax rate unless the foundation continues to give at an extraordinary level in subsequent years,” the senators said.
Sen. Charles E. Grassley, senior Republican on the Senate Finance Committee, said in a statement that the change “may be the right thing to do,” but Congress should also examine other nonprofit issues like whether donor-advised funds and other grant-making charities should pay the excise tax as well.
The Senate bill would eliminate the current two-tier excise-tax system and replace it with a flat rate.
The flat rate would be set between 1 percent and 2 percent, to be determined by Congress’s Joint Committee on Taxation, with a goal of not reducing government tax revenue.
Not Seeking a ‘Tax Break’
According to a study by Cambridge Associates, a consulting company, and commissioned by the Council of Michigan Foundations, to avoid affecting government revenue the rate should be 1.32 percent.
Robert S. Collier, chief executive of the council, in White Haven, applauded the legislation.
“Philanthropy is not asking for a tax break,” he said. “What we are saying is that the way the formula works now is actually hindering charitable giving at a time when foundations ought to be doing more.”
Small foundations without staff members would be the biggest beneficiaries of the change because they often find the variable tax rate confusing and sometimes just pay the 2 percent to avoid paying someone to do the complicated accounting, he said.
Mr. Collier said he did not know whether changing the tax rate would spur a “large amount of new giving,” but that there are foundations that have had to pay the higher rate after stepping up their grant making in response to Hurricane Katrina or other disasters.
“Why penalize them when they want to give more?” he asked.
Some foundation leaders wonder if the tax rate should be set lower than a “revenue-neutral” percentage or eliminated altogether.
Luz A. Vega-Marquis, chief executive of the Marguerite Casey Foundation, in Seattle, said she backs the new legislation, but would prefer the tax rate to fall below 1.32 percent.
“I would support it more if it were at 1 percent,” she said.
Ken Goldstein, a nonprofit consultant in California, questioned the premise of the bill, saying foundations should consider increasing their giving in an emergency, regardless of the tax consequences.
