On September 17 the House passed legislation with tax breaks for charitable giving. The bill, the Charitable Giving Act of 2003 (H.R. 7), is now headed to a conference committee with the Senate. The Senate passed a similar bill, the CARE Act (Charity Aid Recovery and Empowerment Act, S. 476), last spring. In addition to tax breaks for contributions to charities, H.R. 7 provides money for a Compassion Capital Fund, simplification of lobbying rules for charities, reduction in excise taxes for foundations, and authority for states to transfer money from welfare to social service programs. This article includes a summary of the major provisions of H.R. 7, a look at how it compares to the Senate bill, the controversial issues facing the Conference Committee and the administration's position.

Summary of H.R. 7 Major Provisions

Charitable Giving
The biggest tax incentives for charitable giving are:

• Non-itemizer Deduction: Contributions over $250 for single filers and $500 for joint filers can be deducted, with a ceiling of $250 on the amount deducted. This is the most expensive tax break in the package, even though it will only be in effect for tax years 2004 and 2005. The Joint Committee on Taxation has estimated the cost spread out over ten years at $2.8 billion.
• IRA Rollover: Donors age 70 1/2 and over could donate without tax consequences to charities when they rollover their Individual Retirement Accounts. This provision would take effect after December 31, 2003 and cost $2.7 billion over ten years.
• Increase Ceiling on Deductions for Corporate Contributions: Current law only allows corporations to deduct up to 10 percent of their taxable income for charitable contributions. H.R. 7 gradually increases this cap, starting with 11 percent in 2004 and adding an additional 1 percent each year, reaching 15 percent in 2008 and remaining at that level until 2012. In 2012, the cap would become permanent at 20 percent. The cost of this provision is estimated at $1.52 billion over ten years. Some are surprised at the costs since most corporations do not now hit the 10 percent ceiling.

The bill also includes a deduction for food donations and expands the deduction for contributing scientific research property, computer technology and equipment for educational purposes. Additionally, it allows Depts. of Interior and Agriculture to award tax-free grants to private landowners for land that is set aside for habitat or wildlife protection.

Foundations
H.R. 7 reduces the tax on net investment income for private foundations to a flat 1 percent, down from the current rolling percentage that could have gone as high as 2 percent. It also disallows some administrative expenses from counting toward foundations’ "payout." Foundations are required to “payout” at least 5 percent of their assets in charitable distributions each year. The House bill initially disqualified all administrative costs -- rent, salaries to employees, etc. -- to be counted toward the payout calculation. This would have effectively raised the payout for foundations and could have significantly increased the grant dollars given out each year. An analysis by the National Committee on Responsive Philanthropy predicted it could increase payout by as much as $3.2 billion annually. The Council on Foundations vigorously opposed the measure, saying it could force some foundations to spend down their endowments.


The debate on the payout issue was intense, with members of Congress citing scandals involving lavish foundation spending on offices, salaries and other administrative costs. However, during the Labor Day recess many members heard opposition from local foundations. When Congress returned, the Ways and Means Committee’s scheduled consideration of the bill for September 9. Chairman Bill Thomas (R-CA), with support from Majority Leader Tom DeLay (R-TX) did an about face by introducing an amendment allowing most administrative costs. The provisions, as passed, have three parts. Payments over $100,000 a year to "disqualified persons” and non-coach airfare cannot be counted towards payout. "Disqualified persons" are those with substantial powers or financial interests in the foundation, including trustees. Second, only costs for coach-class commercial airfare will count towards payout. Finally, only costs "directly attributable to direct charitable activities; grant selection; grant monitoring and administration activities; compliance with applicable federal, state or local law; or furthering public accountability of the private foundation" can count toward the payout calculation.

A study released in early September focused on fees paid to foundation trustees, using data from 1998 IRS filings and telephone interviews. Foundation Trustees Fees: Use and Abuse, published by the Georgetown Public Policy Institute, shows that the 238 foundations in the study collectively paid their board members nearly $45 million. The bulk of these payments were under $100,000: 14 of 176 large foundations paid their board members more than $100,000 each and 5 out of 63 smaller foundations paid their board members more than $100,000 each. H.R. 7’s limited disallowance on administrative costs will not result in significant reductions in trustee fees counting toward the payout requirement or significant increases in grants to charities. Some have argued that the new provision might even serve as an incentive to pay trustees up to $100,000 per year. (Moreover, the bill does not address self-dealing rules. Trustees currently can earn significant revenue by providing services to the foundation.)

The Council on Foundations sent a letter to Ways and Means Committee Chair Thomas praising the compromise on administrative costs, saying “adequate oversight and enforcement of laws Congress has already passed would prove to correct the behavior of any who would flout the law.” The letter also praised the reduction in the excise tax, saying the impact “will redirect millions in annual tax payments by private foundations from the federal treasury to charities and charitable activities without endangering the long-term viability of foundation endowments.” However, there is no requirement in H.R. 7 that redirects these funds for grants.

Simplification of Rules for Charity Lobbying
H.R. 7 simplifies the lobbying rules for charities. Not considered controversial, the provision eliminates the distinction between direct and grassroots lobbying, doing away with the need for complicated cost allocation and record keeping. It does not change the overall limits on charity lobbying. It would allow charities to spend their lobbying dollars on whatever combination of direct and grassroots lobbying makes the most sense for them. The effective date in the House bill is January 1, 2004. OMB Watch, along with a broad coalition, has strongly supported the provision.

Compassion Capital Fund
H.R. 7 authorizes the Compassion Capital Fund for the Secretary of Health and Human Services (HHS) to “Support and Replicate Promising Social Service Programs.” It allows HHS to make grants to nonprofits and to provide other groups with technical assistance, information on capacity building and best practices. Research on best practices of social service organizations can also be funded. The bill allows an appropriation of up to $150 million for FY 2004, and “such sums as may be necessary for fiscal years 2005 through 2008”. (See related story on the Compassion Capital Fund in this issue.)

Social Services Block Grant
Section 305 of H.R. 7 allows states to transfer up to 10 percent of funds received for welfare programs under the Temporary Assistance to Needy Families Act for Social Services Block Grant programs.

Other Provisions
Section 201 establishes a process for automatic revocation of tax exempt status for organizations designed as terrorist groups by Executive Order or under Section 212 of the Immigration and Nationality Act. The revocation cannot be appealed and the provision becomes effective on the date of enactment. Sec. 203 allows groups to go to court for a declaration on their qualification for tax-exempt status when the IRS rejects their application. This is effective for determinations made after the date of enactment.

Comparison to Senate Bill

Many provisions in the House bill are similar to the Senate's version. For example, both call for a temporary tax deduction for charitable donations made by those who do not itemize. Both bills allow non-itemizers to deduct up to $250 after the first $250 is donated without the tax break. Both bills also allow elderly people to rollover money from their Individual Retirement Accounts to charities without tax consequences, although there are differences that still need to be resolved. The House bill allows the rollover at age 70 ½, but the Senate bill allows it at age 59 ½. And both bills dropped provisions pushing Bush's faith-based, charitable choice plan.

Both the House and Senate passed a provision that simplifies the lobbying rules for charities. As mentioned earlier, the provision eliminates the distinction between direct and grassroots lobbying, doing away with the need for complicated cost allocation and record keeping. It does not change the overall limits on charity lobbying. However, the effective date in the House bill would be January 1, 2004, while the Senate bill would take effect on January 1, 2003.

Parts of House bill are significantly different from the Senate's version. For example, the Senate bill "pays" for the cost of tax incentives ($12.3 billion over 10 years) through elimination of corporate tax shelters; the House does not have any offsets. The House bill will cost $12.6 billion over 10 years, which would either be added to the deficit or force spending cuts to make up for the lost revenue.

The Senate bill included $2.35 billion for FY 03 and $1.3 billion for FY 04 for the Social Service Block Grant (SSBG), and the House bill does not. This was a key reason some groups supported the bill. But the President indicated he no longer supported the increased funding for SSBG after the Senate dropped the charitable choice provisions from its bill. Both bills allow 10 percent of funds appropriated under the Temporary Assistance for Needy Families to be transferred to the Social Service Block Grant.

The House bill also has two provisions affecting foundations that are not in the Senate bill. These might cause controversy in a House-Senate conference. The first provision changes an excise tax, which foundations pay on net investment income to a flat 1% from a rolling percentage that can go as high as 2%. The second provision disallows some administrative expenses, including trustee fees over $100,000, from counting toward the required 5 percent annual foundations distributions to charities. Senator Kay Bailey Hutchison introduced a bill in July that disallows all trustee fees from inclusion in the payout calculation. The rest of Sen. Hutchison’s Philanthropy Expansion and Responsibility Act of 2003 (S. 1514)is similar to the H.R. 7’s foundation provisions.

The Senate bill breaks up the same level of funding for the Compassion Capital Fund among four agencies, while the House bill directs all the funds to the Dept. of Health and Human Services (HHS). Under the Senate version the money is divided as follows: $85 million to HHS, $15 million to the Corporation for National and Community Service, $35 million to the Department of Justice and $15 million to the Department of Housing and Urban Development. It defines "social service organization" as one with no more than six full time equivalent employees providing social services and a current social services budget of less than $450,000. The agencies are required to coordinate their efforts so that funds are distributed equitably and duplication is avoided. In addition, no agency can award more than one grant to the same group for the same purpose.

The Administration’s Position

The White House expressed general support for the House bill in a September 18 Statement of Administration Policy, but said it has concerns about some of the tax provisions. But the most interesting point was its recognition that the bill does not contain revenue-raising provisions to cover the cost of the tax incentives for giving. The statement said, “The Budget Enforcement Act’s pay-as-you-go requirements and discretionary spending caps expired on September 30, 2002. The Administration support the extension of these budget enforcement mechanisms in a manner that ensures fiscal discipline and is consistent with the President’s budget. The Office of Management and Budget’s (OMB) cost estimate of this bill is currently under development.”

The statement did not specify what its concerns on tax incentives are. However, Treasury Assistant Secretary for Tax Policy, Pam Olsen, told the Ways and Means Committee that Treasury does not support provisions allowing charities to make grants for collegiate housing (tax deductions for contributions to fraternities and sororities) and a pilot forest conservation program, since it would only affect the state of Washington.

What’s Next- Conference Committee Issues

With ballooning deficits and the Iraq war costs putting pressure on Congress to offset any tax cuts with revenue raising provisions, the $12.3 -$12.6 cost of this legislation will be a major issue for the conference committee. Rep. Roy Blunt (R-MO), the House Majority Whip and a lead sponsor of H.R. 7, said this would be a major item in conference negotiations. He also said he believes offsets are unnecessary. His Democratic co-sponsor, Rep. Harold Ford, Jr. (D-TN) supports offsets, but said he believes the legislation is so important that it should pass even if it does not pay for itself. Blunt and Ford estimated that the bill will increase charitable giving by $40-$50 billion over ten years.

After the Ways and Means Committee approved H.R. 7 on September 9, Senator Rick Santorum (R-PA), a lead sponsor of the CARE Act, said, “We’re going to fight for the Senate bill”.

House Democrats tried twice to pass amendments providing the offsets for H.R. 7’s cost. During committee consideration of the bill Rep. Lloyd Doggett (D-TX) proposed an amendment that would have closed corporate tax loopholes. That amendment was defeated. During the floor debate the proposal was raised again, along with restoration of funds for the Social Service Block Grant, in an amendment offered by Rep. Benjamin Cardin (D-MD). That was defeated by a 203-220 vote.