December 10, 2009 | Read Time: 1 minute
Members of the U.S. House of Representatives have proposed a bill that would simplify the tax code for foundations, a move they say would encourage grant makers to give more during the economic downturn.
The bill, HR 4090 — which is similar to Senate legislation, S 676, proposed in March — would change the way foundations pay excise tax on net investment income.
Foundations currently are subject to a 2-percent or a 1-percent tax. 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 the two-tier tax was intended as an incentive for foundations to give more, lawmakers and foundation officials argue it has had the opposite effect.
They say it pushes foundations not to raise their grant making significantly in any one year because that increase would raise the average donation amount, thereby requiring the organizations to continue to give at a higher rate in subsequent years to avoid the 2-percent tax rate.
The House bill would eliminate the current two-tier excise tax system and replace it with a flat rate of 1.32 percent.
The Council on Foundations, an association of grant makers, backs the proposal, and it has bipartisan support from Rep. John Lewis, a Georgia Democrat; Rep. Danny Davis, Democrat of Illinois; and Rep. Patrick Tiberi, an Ohio Republican.
But some foundation officials have questioned the bill, saying it would mean a tax increase for grant makers that usually pay 1 percent.
