In an appearance before the Senate Finance Committee, Dorothy S. Ridings, president and CEO of the Council on Foundations, told committee members that private foundation giving would actually increase by hundreds of millions of dollars a year if the excise tax on private foundations was repealed.
The tax, generally two percent of a foundation's annual net investment income, was enacted in 1969 to cover the costs of IRS oversight of private foundations. The tax counts as a credit against the annual minimum distribution, or "payout" — currently five percent of a foundation's assets — that private foundations are required to make under federal law.
"It is important to emphasize that repeal would have no financial benefit for foundations," Ridings said in a statement for the hearing record. "Every dollar not paid in taxes would go directly into the charitable stream."
Under a provision enacted in 1984, foundations may pay one percent of the net investment income, rather than two percent, if their payout in a given year is greater than the average of the preceding five years. Congress intended the rule to spur more giving, but in practice the rule has acted as a disincentive to higher distributions.
Ridings also argued for the repeal of a provision that taxes charities' income on leveraged real estate holdings.
"There is no valid tax policy reason to exempt pension funds and educational institutions from section 514 but not charities," Ridings said. "Endowed private and community foundations often are urged by their investment advisors that a portion of their assets should be invested in real estate as a hedge on inflation. It is the nature of real estate markets that the most attractive...investment options involve purchases that are heavily financed by debt. Current law discourages this prudent investment choice by endowed foundations."