House Proposes Bill to Simplify Foundation Taxes

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 their net investment income.

Foundations currently are subject to a 2 percent or 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 the opposite effect. They say it pushes foundations not to dramatically raise their grant making in any one year because it 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 John Lewis, a Georgia Democrat; Danny Davis, a Democrat from Illinois; and Patrick Tiberi, an Ohio Republican.

But some foundation officials have questioned the bill, saying that for the groups that usually pay 1 percent, the change would mean a tax increase.

Read The Chronicle’s article about the Senate proposal.