Charity Legislation Faces New Hurdle in Congress: Budget Realities

By Brad Wolverton

As members of the U.S. House of Representatives prepare to vote on proposed charity legislation that was stripped of a controversial foundation provision last week by the House Committee on Ways and Means, the bill faces new budgetary obstacles that might prevent it from being enacted into law, some observers say.

As the federal government grapples with a $400-billion deficit, President Bush last week asked Congress to provide an additional $87-billion to cover the increasing cost of occupying Iraq. The Charitable Giving Act, HR 7, would reduce government revenue by $12.6-billion during the next 10 years by allowing people who do not itemize deductions on their income-tax returns to write off some of their charitable gifts, and by permitting people 70 1/2 or older to shift money from their individual retirement accounts directly to charity without paying federal income tax on the withdrawals.

Some members of Congress are balking at any such proposals that would deepen the deficit.

“It astounds me that we’re considering giving additional tax breaks with the fiscal calamity this country is in,” Rep. Gerald D. Kleczka, a Democrat from Wisconsin, said last week. “Approving this legislation would be foolhardy.”

While it is not clear how many lawmakers share his view, the “sticker shock” that Mr. Bush’s $87-billion request has caused on Capitol Hill might lead to the eventual downfall of charity legislation this year, says Paul C. Light, a professor at New York University’s Wagner Graduate School of Public Service, in New York.

He and others, including Rep. Robert T. Matsui, a Democrat from California, expect the legislation to pass in the House, partly because it is backed by Rep. Bill Thomas, an influential Republican from California who is chairman of the Ways and Means Committee. In April the Senate passed its version of the bill, the Charity Aid, Recovery, and Empowerment (Care) Act of 2003, which also includes provisions allowing people who don’t itemize to write off charitable gifts and older people to shift retirement money to charity tax-free.

But whether a compromise can be struck with the Senate, assuming the House passes its bill — and whether President Bush intends to support the legislation — remains unclear.

While Mr. Bush endorsed efforts to stimulate charitable giving as part of a program to help religious groups, some observers suggest that he might not support any legislation that increases the federal deficit, especially considering next year’s presidential election. A White House spokeswoman did not respond to questions about the president’s position.

If a bill doesn’t pass this year, it will be the third consecutive year that lawmakers have failed to pass legislation that attempts to spur more charitable giving.

Foundation Provision

Last week, the House Committee on Ways and Means amended the proposed Charitable Giving Act by removing a provision that would have barred foundations from counting operating expenses like rent and salaries when they calculate the 5 percent of assets that they must distribute each year to charities.

The committee instead adopted a plan based on proposals by the Council on Foundations, a trade group in Washington that represents mainly large foundations.

The legislation still attempts to deal with concerns that several lawmakers have expressed about foundations that pay excessive compensation, write off noncharitable expenses, and engage in self-dealing, which happens when someone is involved in a transaction with a nonprofit group while having a significant tie to the organization.

The bill would limit to $100,000 per officer or director the amount that foundations can count as an administrative expense. The bill also would prohibit foundations from counting first-class airfares toward their payout requirement, and prevent them from counting any administrative expenses that are not “directly attributable to direct charitable activities.”

The proposed legislation also would impose a penalty for self-dealing amounting to 25 percent of the value of the prohibited transaction. In addition, the bill would reduce to 1 percent the excise tax that foundations must pay on their net-investment income.

Adding Complex Rules

Rick Cohen, executive director of the National Committee on Responsive Philanthropy, a watchdog group in Washington, strongly supported the provision in the original Charitable Giving Act that effectively would have increased the payout rate for private foundations. He condemned last week’s action: “Rather than simplifying regulations governing foundations, this bill now makes the regulations more complex. Rather than constraining trustee fees, this is likely to induce higher trustee payments,” he said. “The intent of this bill was to increase grant making and charitable giving, but there is nothing in the amended section on foundations that addresses that purpose.”

While most small foundations would probably support the amendments to HR 7, according to Timothy R. Walter, chief executive of the Association of Small Foundations, in Bethesda, Md., some of them believe that lawmakers lost an opportunity to force foundations to provide more money for charities distressed by cutbacks in state funds.

“Foundations’ claiming that the original payout provisions in this legislation would jeopardize their endowments was not believable,” said David Stern, president of the Stern Family Fund, in Arlington, Va. “I would like to see an increase in the 5-percent payout rate, and I would have liked to see lawmakers exclude administrative expenses from the foundation payout requirement.”

Several large foundations contacted by The Chronicle refused to comment on the changes made to the bill, saying that it was premature to do so before members of Congress had voted.

The Council on Foundations lobbied vigorously to remove the payout provision, and the current legislation reflects ideas it proposed. “This is certainly not an ideal package,” said Dorothy S. Ridings, the group’s president. “It will force us to educate foundations on how to correctly interpret the provision dealing with administrative expenses. But we’re pleased that the Ways and Means Committee understands the need for more reasonable reforms.”

Ian Wilhelm contributed to this article.