FOR IMMEDIATE RELEASE: March 25, 2009
SCHUMER, LEVIN, STABENOW PUSH TO CREATE TAX INCENTIVE FOR INCREASED CHARITABLE GIVING BY FOUNDATIONS
Current Law Penalizes Foundations That Increase Charitable Contributions by Taxing Them at Higher Rate in Subsequent Years
Legislation Would Remove Tax Penalty for Charitable Generosity In Challenging Economic Times
Senators: Tax Code Should Reward Charitable Giving by Foundations, Not Discourage It
WASHINGTON, DC—U.S. Senators Charles E. Schumer (D-NY), Carl Levin (D-MI) and Debbie Stabenow (D-MI) today announced that they have introduced legislation to simplify the tax code for private foundations, a move that would create a new incentive for increased charitable giving. The current excise tax imposed on private foundations punishes them for years in which they increase giving by taxing them at a higher rate in the subsequent years. The tax code was intended to encourage giving, but the current two-tiered excise tax system instead has the opposite effect.
“In today’s economy, the need for charitable gifts is greater than ever, and we should be encouraging foundations to increase giving,” Schumer said. “Foundations play an important role in investing in our universities, the arts, community charities, and vital programs for those most in need. The tax code should thank foundations for these efforts, not tax them for their generosity.”
“Grants provided by private foundations have an enormously positive impact on communities across the nation, which is especially important as more people need a helping hand during this recession,” Levin said. “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.”
“We need to make sure charitable foundations are able to help struggling families during this economic crisis,” said Stabenow. “I am pleased this bill will eliminate a tax burden felt by foundations at times when there is a great need for generosity.”
Private foundations are generally exempt from federal income tax; however, they are required to pay a 2 percent excise tax on their net income in order to cover the costs of the IRS’s oversight of exempt organizations. Under current law, that excise tax is reduced to 1 percent in any year in which the foundation’s charitable donations exceed the average charitable giving of that foundation in 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. 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.
For instance, consider a foundation that distributes $100,000 in donations in year one. In order to qualify for the lower 1 percent tax rate the following years, the foundation gives $101,000 only slightly more than the average, for the next four years. Over the course of five years, the organization minimizes their tax burden by keeping their contributions close to – but slightly above – the organization’s average giving.
However, if the foundation increases giving dramatically in year six in response to a national crisis, such as Hurricane Katrina or September 11, 2001, the foundation is severely punished by the tax code. For instance, if the foundation gives $2 million in year six, they pay excise tax at the 1 percent rate, just as they have in the previous four years. But if the foundation returns to its previous level of giving ($101,000), or even doubles their previous level of giving (to $200,000) in the following five years, it must pay excise tax on their net income at the 2 percent rate for the each of those five years, because it is giving at a rate well below the foundation’s new five-year average.
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 the years.
The senators’ legislation would remove this disincentive by eliminating the two-tier excise tax system and replacing it with one flat rate. That rate would be set between 1 and 2 percent at a revenue neutral level, as determined by Congress’s Joint Committee on Taxation. According to a study by the Council on Michigan Foundations, the revenue neutral rate would be 1.32 percent. By choosing a revenue neutral tax rate, the new tax policy will cost the federal government nothing, but the senators predict 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.
In a letter to Senator Schumer, Steve Gunderson, CEO of the Council on Foundations, an alliance of over 2,100 grant-making foundations and corporations, endorsed the legislation and wrote, “We believe this change will make a real difference in addressing the growing needs in our communities. Private foundations fund much of the innovative and urgent work of nonprofits across this country and have a long history of working hand in hand with the government at critical junctures. This change in the tax laws will help us do even more with our funds, without facing a future penalty.”
Multiple private foundations have also endorsed the bill.
“Although the excise tax doesn’t apply to community foundations, we applaud Senator Schumer’s bill to flatten the tax to 1 percent. It will put more money into the grantmaking budgets of our private foundation colleagues—and ultimately into the budgets of strapped nonprofits coping with smaller donations and increasing demand,” said Lorie A. Slutsky, President of The New York Community Trust.
“At a time when Foundations are being asked to do more with less in order to meet growing human and other needs, the complicated excise tax discourages them from responding. A flat, revenue-neutral tax will reduce administrative costs and result in more funds for important community needs. Senator Schumer has been an indispensable leader for this much needed reform,” said Lance Lindblom, President and CEO of the Nathan Cummings Foundation.