When the “Charitable Giving Act of 2003" H.R. 7 was introduced in the House last month, there were optimistic statements that the Ways and Means Committee could consider the bill before the July 4 recess. However, no action is pending and controversy about provisions involving foundations is gaining national attention. The bill proposes excluding administrative and operating costs from the annual required "payout" of 5% of foundation assets. Currently, both administrative costs and grants count toward the 5% requirement. A recent report by the National Committee for Responsive Philanthropy (NCRP) estimates the House proposal would increase foundation grants by $4.3 billion a year. The estimate is based on the amount foundations spend on administrative costs in 2001, according to the National Center for Charitable Statistics. The Council on Foundations has criticized the NCRP study, claiming that it is seriously flawed. Leaders in the foundation world are opposing the provision, saying it would eventually force many to spend down their assets. NCRP disputes this claim, noting that the net effect would raise overall payout to 5.4%, an overall increase of .04%, a level it says makes foundations sustainable. NCRP cites several studies that conclude that foundations can pay more than 5% in payout without undermining perpetuity. Even so, some foundations claim it would be quite troubling. For example, one foundation claims that it would need approval from the courts to receive enough money from its two trusts in order to insure that there are not cuts in annual grant making. The Foundation Executives Group, made up of the Carnegie Corporation, the Mellon Foundation, the Bill and Melinda Gates Foundation and Hewlitt Foundation, has hired former Republican Representative Bill Paxon, now a lobbyist at a major national lobbying firm, to represent them in the debate in Congress. Not all foundations oppose the House provision. For example, Diane Feeney of the French American Charitable Trust writes for the Philanthropy Journal that the House provision is quite supportable. Meanwhile, the House debate has gained national attention, with papers like USA Today endorsing the proposal (in a May 29 editorial and the New York Times calling for congressional hearings to assess the potential impact in a June 8 editorial. It is quite striking that this payout issue has swamped the discussion about other parts of the bill. While the outcome in the House is unclear, it does appear that the sponsors of H.R. 7, Reps. Roy Blunt (R-MO) and Harold Ford, Jr., (D-TN), were surprised by the overwhelmingly negative response by foundations. Whether it had its intended impact on the sponsors in unknown. OMB Watch has not taken a position on this issue. On a related matter, we have suggested that the foundation excise tax on net investment income be reduced to a flat 1%. The revenue it generates should be used for increased oversight of the nonprofit sector by the Internal Revenue Service as well as for grants to nonprofits for efforts to strengthen accountability.