Budget Plan Would Change Foundation Excise-Tax Rate

President Obama wants to simplify the way private foundations pay excise taxes on their investment income.

In his 2012 budget proposal, Mr. Obama is calling for a flat 1.35-percent tax rate on the net investment income earned by private foundations.

Proponents of the change, including the Council on Foundations, say the move would encourage grant makers to give more during the current hard times for charities.

Foundations currently are subject to a 2-percent or a 1-percent tax. They qualify for the lower rate in any year in which the percentage of assets they direct toward charitable distributions is larger than the average percentage of their distributions during the previous five years.

The system was designed to get foundations to give more, but some believe it has had the opposite effect. Foundations that sharply increase giving in one year raise their average donation amount and therefore must continue to give at high rates in subsequent years to avoid the 2-percent tax rate. Some foundations may be reluctant to raise their giving in any one year as a result.

Last June, Sen. Charles E. Grassley, senior Republican on the Senate Finance Committee, said that any proposed change to the excise tax deserves formal study and that he was not convinced that simplifying the tax rate would lead to higher pay-out rates by charities.