Dave Camp’s Tax Reform Could Kill Community Foundations

By :: April 24th, 2014

House Ways and Means Committee Chair  Dave Camp deserves credit for proposing a tax reform that takes on many special interests,  something  too few other elected officials are willing to do. But one provision mistakenly threatens the survival of most community foundations without improving the tax system or strengthening the charitable community.

The proposal would effectively eliminate most donor advised funds (DAFs), the major source of revenues to community foundations, so they could no longer provide long-term support for local and regional charitable activities. Instead, those funds would need to pay out all their assets over a period of five years.

DAFs support community foundations in two ways. First, donors pay about one percent of asset value to the foundation for sponsoring the fund. Second, community foundations distribute donor gifts to many local charities.  By simplifying giving and reducing costs, they make it possible for people who are not wealthy to  endow charitable activities.

Requiring a community foundation to pay out all its assets over five years is equivalent to telling the Ford Foundation that it, too, must pay out all of its endowment over a short period of time.  But the draft bill only targets those with limited funds, while it leaves the really big guys like Ford alone.

Usually, I analyze tax policy as a disinterested observer. But as chair of a community foundation called ACT for Alexandria, I have a personal interest in this issue.

So let me tell you how this proposal would lead to the demise of many of our activities and, likely, the community foundation itself.

Each year we engage in a one-day fundraising effort for the charities of Alexandria, VA, a city of about 145,000 across the Potomac River from  Washington, DC.  This year we raised over $1 million for 121 local charities, and many contributions to support the effort itself, not just the charitable contributions themselves, came from our donor advised funds.

The fees we earned from the funds supported our program to train  local charities on how to better use social media and do online fundraising. No one else in the community does this coordination and training.

In addition, several of our donors create DAFs, often small, to engage their families in philanthropic efforts. By doing so, they encourage a new generation to make  charitable giving  part of their lifestyles.

DAFs give donors  flexibility to vary their gifts as circumstances  change. For instance, one of our funds provides long-term support for schools in Afghanistan through U.S.-based charities, but  there is no guarantee that any particular Afghanistan project would be strong enough to merit a direct permanent endowment.  Other funds support a long-term examination of early childhood education opportunities in Alexandria, a project likely to change as needs change. DAFs or equivalent funds also allow “giving circles” that combine small gifts to assist an activity without having to create a new charity every time.

Without these funds, we likely would be unable to support a grant program for capacity building and training of local nonprofit leaders.

I doubt seriously that Chairman Camp’s staff saw fully how they would wipe out most community foundations and confine endowment giving only to the rich. By making it more complicated and expensive to engage in such activity, they would move almost all endowment decision-making to elite, often established institutions where the average citizen has little or no voice and where the operational expenses are greater.

Why are critics of DAFs so worried about someone having a say over an annual grant of $5,000 out of an endowment but not when the President of Harvard decides over time how to spend billions of dollars out of the income from an endowment?

There are legitimate concerns over how such donor advised funds should be regulated. It may even be possible to design a proposal for a minimum annual payout, though, if badly designed, such a limitation could curb the ability of some people to build up assets to make a major gift to try to achieve some large charitable purpose.

The very small literature I have seen arguing for this type of proposal entangles DAFs and community foundations with  separable  issues. For instance, one can argue about the extent to which givers to charity should be allowed special capital gains treatment. But those discussions go well beyond DAFs, and removing DAFs as a source of more endowed funds hardly targets the perceived problem.

Still, I also understand why tax staff and policymakers sometimes see charities as just another special interest. The charitable sector needs to go beyond its “we’re all good, leave us alone” mantra, and address real problems as they arise.

There are ways for Congress to reform the tax laws that would raise revenues and strengthen the charitable sector. But this DAF proposal would wipe out most community foundations, increase administrative costs, and raise nothing or almost nothing for Treasury.

An earlier version of this column stated that a fund-raising effort by ACT for Alexandria supported over 200 charities; the corrected number is 121 charities

10Comments

  1. Michael Bindner  ::  2:55 pm on April 24th, 2014:

    Thank you for making clear the link between DAFs and community foundations. I suspect that there is also a link with the long-held attack by Republicans on Urban Development Action Grants (UDAG) and the Community Development Block Grant. These programs have been a stepping stone to many African American community leaders into city government (say, like Pride Foundation and Marion Barry). This attack is similar to the attack on unions, particularly those that fund the Democratic Party. When one connects the dots, the partisanism and racism become overwhelmingly apparant, even as they deny it. For this bill to ever pass (a slim chance at best), this provision would have to go.

  2. Tax Roundup, 4/25/14: Why the move to tax return selfies? And: Iowa’s unhappy high ranking. « Roth & Company, P.C  ::  10:08 am on April 25th, 2014:

    […] Gene Steurle, Dave Camp’s Tax Reform Could Kill Community Foundations: […]

  3. AMTbuff  ::  10:53 am on April 25th, 2014:

    Unintended consequences are inevitable when making major changes. The trick is to anticipate and avert as many of them as possible. Articles like this one are crucial, but even more important is that legislators act on the warnings rather than charging ahead heedlessly. We have had far too many examples of the latter behavior on major legislation.

  4. Lewis R. Lowden  ::  11:26 am on April 28th, 2014:

    To the Honorable Representative Dave Camp

    Please tell me that you and your staff are in the process of correcting this over-site/flaw in your tax reform bill for it is clearly counter-productive, i.e. unless one takes the POV of Mr. Michael Bindner (who posted above); let us pray what Mr. Bindner stated does not truly reflect your weltanschauung in these matters.

  5. Steven Woolf  ::  2:23 pm on April 28th, 2014:

    Thanks, Gene for your articulate discussion of the donor advised fund issue and the implications of the proposal by Chairman Camp. We agree that donor advised funds are an essential charitable giving vehicle for many sponsoring organizations. Many Jewish federations serve this function for their donors and are extremely proud of the charitable accomplishments that have been achieved through their stewardship. (Collectively, Jewish federations are sponsoring organizations of over $4 billion in DAF assets and annually distribute approximately 18-20 percent of such assets to qualified charities.)

    DAFs are an essential component of Jewish federation’s mission to inspire Jews to fulfill their religious duty to be charitable, help secure the financial and human resources necessary to care for those in need, rescuing Jews in danger, and, in no small part, ensure the continuity of the Jewish people. They offer an efficient and economical means for a donor to benefit the community and encourage family philanthropy, often enabling such donors to better identify their charitable goals and interests.

    In addition to providing financial resources for critical human services in the local Jewish and general communities, DAFs also advance the values and goals of the federation system through:
    (1)Nurturing relationships between Jewish philanthropists and federation lay and professional leadership;
    (2) Building leadership and social capital within the Jewish community, helping to groom the next generation for key positions in federations and affiliated agencies;
    (3) Establishing and validating programmatic priorities that consider the current and future needs of the Jewish community;
    (4) Reinforcing the positive perception of the federation as a philanthropic partner within the larger community; and
    (5) Helping to meet the annual funding needs of federations and their agencies. To this last point, it is worth noting that in many Federation communities, these funds operate to provide almost one-fifth of the funds of the “annual campaign,” which continues to be the most important fundraising activity conducted in the Jewish philanthropic world.

    Another way of telling the DAF story is to focus on who benefits from these vital giving vehicles. First, the Jewish community and its philanthropic and social service mission benefit because they provide a reliable pool of dollars to fund a variety of social service activities. Recently, one large federation tapped its DAF donors to fund a shortfall in Federal funds for kosher meals to seniors that fell subject to arbitrary sequestration budget cuts.

    Some may question the value of “charitable checking accounts,” but we at the Jewish federations would invite those critics (and Chairman Camp) to examine the life-saving work that DAFs help accomplish, each and every day.

  6. Dave  ::  5:08 pm on April 30th, 2014:

    This is a great article and should be shared. I’d just like to add another interesting fact – DAFs payout a greater percentage of their funds than private foundations who tend to stick to the required minimum distribution of 5%. Some do go higher (especially if they have a sunset clause in place), but I don’t think I’ve ever seen one go above 10% unless it’s replenished annually by the donor. According to the National Philanthropic Trust, DAF payout rates are at 16%! http://www.nptrust.org/daf-report/recent-growth.html

    While the politicians’ mouths may water as they think of all that tax revenue they could get from Fidelity or Schwab’s DAF accounts, the fact is that DAF holders are probably some of the most philanthropically engaged people in the country!

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