Senators Propose Measure to Encourage Foundations to Give More

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, a Democrat from Michigan.

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 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,” the senators’ press release said.

“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.

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 at a level, to be determined by Congress’s Joint Committee on Taxation, that would not cost the Treasury any money, the senators said. “According to a study by the Council of Michigan Foundations, the revenue neutral rate would be 1.32 percent,” the senators’ press release said.

“By choosing a revenue neutral tax rate, the tax policy will cost the federal government nothing,” the press release added, “but the senators predict that it will increase charitable giving substantially by removing the tax disincentive to one-time increases in charitable giving as well as simplifying the tax compliance for foundations.”

Praise from Nonprofit Leaders

In a letter to Senator Schumer, Steve Gunderson, president of the Council on Foundations, a Washington association that represents about 2,000 grant makers, applauded the legislation.

“We believe this change will make a real difference in addressing the growing needs in our communities,” Mr. Gunderson said. “It will allow private foundations to increase their payout rates, as most of our member foundations have done recently, and not be penalized.”

Mr. Gunderson continued: “We do not want the excise tax to serve as an unintended disincentive for foundations to increase giving and respond to the economic crisis or future natural or man-made disasters.”

Diana Aviv, president of Independent Sector, a national coalition of charities and foundations, said her organization is studying the new bill and has not yet taken a position on it.

Independent Sector has long supported a “one-tier tax system” for foundations, Ms. Aviv said. The tax should be set at substantially below 2 percent — at 1 percent, for example — or even eliminated, she said.

“During a crisis period, one needs to find ways to incentivize foundations to give more as much as possible,” said Ms. Aviv.

Sen. Charles E. Grassley, senior Republican on the Senate Finance Committee, said in a statement about the bill that “this change may be the right thing to do, but, at the same time, Congress should make sure the rules are fair, regardless of whether you’re talking about a private foundation or a public charity.”