Senate Measure Seeks to Spur Foundations to Give More
March 25, 2009, The New York Times — Three senators introduced legislation Tuesday intended to encourage foundations to give away more of their money.
The measure would change the way foundations are taxed on their investment income, replacing the current two-tiered system with a single tax rate. Foundations complain that the current system effectively penalizes them when they give away more money than usual.
“The need for philanthropy is greater than ever in this weakened economy, and we should be encouraging foundations to increase their charitable giving,” said Senator Charles E. Schumer, the New York Democrat who is sponsoring the bill along with Senators Debbie Stabenow and Carl Levin, Democrats of Michigan.
Under current law, private foundations must make grants and other expenditures for charitable purposes equal to at least 5 percent of the market value of their assets. In calculating that payout rate, foundations are allowed to include the 2 percent excise tax they generally pay on their investment income.
That excise tax is reduced to 1 percent in any year that a foundation distributes more than the average percentage of assets it has given away over the five preceding tax years, a break that was intended as an incentive to give more.
But the increased spending naturally raises the five-year rolling average going forward. And that, says the Council on Foundations, means that a foundation that increases its payout, to address a crisis like Hurricane Katrina or the current economic implosion, will pay taxes at the reduced rate for one year but the higher rate for some time after that, unless it continues to make greater and greater payouts.
Supporters of the new bill contemplate a single tax rate of 1.32 percent, but caution that to ensure there will be no loss of revenue to the Treasury, that figure is considered only preliminary.
The effort was applauded by Robert S. Collier, chief executive of the Council of Michigan Foundations, which has commissioned research showing that a less cumbersome tax system would promote institutional giving.
“We are confident this will stimulate more giving by foundations,” Mr. Collier said, “simply by making the administration of tens of thousands of smaller and midsize foundations much easier because they won’t have to spend a lot of time with their accountants trying to figure out if they have to pay 1 percent or 2 percent.”
Foundations and others contend that the current system, established in 1986, discourages higher payouts in times of need.
“This year, most of the foundations in Detroit will be paying out much more than they have in the past because of the needs,” said C. David Campbell, president of the McGregor Fund, a foundation based in that city. “But that will leave all of us in the position of paying more taxes going forward, which ironically will further diminish what we have to support nonprofits.”
The excise tax, Mr. Collier noted, is the only tax on nonprofit groups. The revenue it generates was intended to support the Internal Revenue Service’s oversight of tax-exempt organizations. In fact, however, only $87.8 million of the more than $600 million that the tax raised last year was spent for that purpose, the rest going to finance government operations at large, the Council on Foundations says.
