NCPA - National Center for Policy Analysis

The Charitable Giving Act of 2003

September 8, 2003

Concern that perpetual foundations care more about themselves than their mission is playing out in the current debate in Congress over H.R. 7, the Charitable Giving Act of 2003. The bill would reduce the tax that foundations now pay from 2 percent to 1 percent, but would at the same time require foundations to discontinue the practice of counting administrative and operating costs when calculating their federally required 5 percent annual payout rate.

This modest change has the potential to funnel an additional $2 billion to $4 billion into the nation's charities at a time when state and local budgets are shrinking and needs are increasing, says David Stern, president of the Stern Family Fund.

Lobbyists for the biggest foundations are pushing hard against the latter provision of this bill, he says, because they have the most at stake:

  • The top 1 percent of foundations have overhead that equals half the aggregate overhead reported by the nation's 58,000 foundations.
  • Among the costs, according to a Georgetown University study released last Friday, were $45 million paid to wealthy board members and trustees of the top 238 foundations in 1998 alone.

Nevertheless, explains Stern, these foundations claim that the proposed change requiring a 5 percent payout without counting overhead will eat away at their endowments, thereby threatening future grant-making, despite the fact that a 1999 study calculated that even a 6.5 percent payout rate from 1950 to 1998 would have allowed foundation assets to grow by 24 percent.

Foundations interested in perpetuity, says Stern, would have new incentives to keep administrative costs down. If foundations kept their overhead at 15 percent -- something they often require of their grantees -- the proposed reduction in the foundation tax would more than cover all administrative costs.

Source: David Stern, "Philanthropy Where It Counts," Washington Post, September 8, 2003.


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