Statement of the Hon. Cliff Stearns, a Representative in Congress from the State of Florida

Testimony Before the Subcommittee on Human Resources and
Subcommittee on Select Revenue Measures
of the House Committee on Ways and Means

Hearing on H.R. 7, the "Community Solutions Act of 2001"

June 14, 2001

I first want to thank you for allowing me the opportunity to appear before the Subcommittee this morning regarding HR 804 - a bill to repeal the excise tax on the net investment income for private foundations. I would also like to thank those Ways and Means Committee Members who are supporting this effort: Mr. Crane, Mr. Lewis, Mr. Jefferson, Ms. Thurman, Ms. Johnson, and Mr. Ramstad. In addition, I also want to thank my colleague Mr. Watts for his support.

One of the most effective steps Congress could take to spur charitable giving would be to repeal the excise tax on net investment income. As you know, private foundations generally are subject to a 2 percent excise tax on their net investment income. The tax can be reduced to 1 percent in any year in which the foundation's percentage of distributions for charitable purposes generally exceeds the average percentage of its distributions over the five preceding taxable years.

Private foundations generally must make annual distributions for charitable purposes equal to roughly 5 percent of the fair market value of the foundation's endowment assets. The excise tax paid acts as a credit in reducing the 5 percent requirement.

This law presents several problems.

First, the original need for the tax no longer exists. The tax was originally enacted in the Tax Reform Act of 1969 as a way to offset the cost of government audits of these organizations. However, excise tax revenues have steadily climbed and IRS audits of private foundations have steadily dropped over the past decade. In 1990, the excise tax raised $204 million and the IRS conducted 1,200 audits of private foundations. In 1999, the last year for which figures are available, the excise tax raised $499.6 million with the IRS conducting 191 audits.

Congress reduced this tax in 1978 and 1984. In both instances it was noted that the adjustments were necessary because the revenues collected from the tax were more than what was necessary to fund IRS activities regarding these foundations. Evidence of this is found in the current year budget for the IRS regarding exempt organizations, which is about $58 million.

Second, as the Joint Committee on Taxation recognized in its April 2001 recommendations to simplify the tax code:

"The excise tax based on investment income creates complexity because every private foundation, except exempt operating foundations, is required to calculate net investment income, which is a technical and difficult calculation. Indeed, the IRS often has to rule whether certain income is includible in the calculation of net investment income. In addition, the two-tier nature of the tax means that private foundations have to calculate their average percentage payout for the base period and decide whether to increase charitable distributions in order to obtain the lower rate. Solely because of this excise tax, foundations are required to make quarterly estimated tax payments. Additional complexity exists for taxable private foundations because such foundations are required to calculate the tax on net investment income as well as any unrelated business income tax that would have been owed if the foundation were a taxable foundation."

Finally the tax is inequitable as other tax-exempt organizations are also audited, however, private foundations are the only tax-exempt organizations that are, in fact, taxed.

Mr. Chairman, repeal of the excise tax would result in an increase in qualifying distributions of hundreds of millions of dollars every year, boosting the ability of charitable organizations to address national priorities across the range of fields that are the focus of some 58,000 private foundations. The state of Florida ranks 11^th in the country in total foundation giving with over 2,000 foundations. Roughly 90% of those are private foundations.

I respectfully urge the committee to include repeal of the excise tax in appropriate legislation.

Thank you and I am happy to answer any questions.