NCPA - National Center for Policy Analysis

Some Charities Opt To Pay More In Taxes

February 24, 2000

Because of quirks in the nation's tax laws, some charitable foundations decide to curb their donations even though that means they will have to give more to the government. Such was the decision of the Carnegie Corporation of New York and of the Lilly Endowment in 1998.

In Carnegie's case, the decision to cut back on giving was prompted by a review of its priorities. The Lilly Endowment declined to comment on its decision.

  • A two-tier federal excise tax requires foundations that maintain or increase their level of giving to pay the government 1 percent of their annual investment income -- or 2 percent if their giving declines.
  • By law, foundations must give away 5 percent of their assets each year to retain their nonprofit status.
  • A provision in the administration's 2001 budget would replace the two tiers with a flat 1.25 percent tax -- so as to allow foundations to make grants without regard to the tax impact.
  • As a result of the bull market on Wall Street, foundation assets reached $330 billion at the end of 1997, with grants totaling almost $16 billion and an estimated $430 million paid in excise taxes each year.

With the swift increase in asset values in the past several years, some foundations have found themselves hard pressed to give away enough in well-thought-out grants.

Source: Reed Abelson, "Some Foundations Choose to Curb Donations and Pay More Taxes," New York Times, February 24, 2000.


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