Tax-Policy Change Is Proposed for Charities

WASHINGTON, MARCH 25, 2009, The Wall Street Journal — A handful of senators introduced a tax-policy change Tuesday that they say would encourage charitable foundations to increase their giving.

Democratic Sens. Charles Schumer of New York and Carl Levin and Debbie Stabenow of Michigan introduced a bill that would put a single tax rate on foundations' investment income. Current policy puts different tax rates on the investment income based on how much money foundations distribute to charity over periods of time.

Republican Sen. Richard Burr of North Carolina also was expected to sign on to the measure, said a person familiar with the matter. A spokesman for Mr. Burr said he was reviewing the legislation and hadn't made a decision.

At issue is the current two-tiered excise tax on foundations' net-investment income. Though generally tax-exempt, foundations must pay a 2% tax on their net-investment income to cover Internal Revenue Service oversight costs. The tax falls to 1% in any year in which a foundation's percentage of distributions to charity exceeds its average percentage of distributions over the five preceding taxable years.

Foundations are required by law to distribute 5% of their assets annually. But if they significantly increase that distribution in a given year, it raises the five-year rolling average. That, in turn, makes it harder to exceed the average to get the tax dropped to 1%.

Nonprofit lobbyists have pushed to have the tax restructured, arguing the current system discourages foundations from making big payouts in any given year. "The need for charitable gifts is greater than ever, and we should be encouraging foundations to increase giving," Mr. Schumer said in a prepared statement. "Foundations play an important role in investing in our universities, the arts, community charities, and vital programs for those most in need."