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Statement of Mary Sue Coleman, President The University of Iowa
Before the United States Senate Finance Committee
March 14, 2001

 

I am Mary Sue Coleman, President of the University of Iowa. I would like to thank you for your interest in charitable giving. I would like to give special thanks to you Senator Grassley for your long interest in higher education and health issues and for inviting me to provide public testimony to this committee.

President Bush has proposed as part of his overall tax plan to allow tax-free charitable gifts from Individual Retirement Accounts to "encourage an outpouring of giving." This proposal is embodied in the IRA Charitable Rollover Incentive Act, S. 205, which was recently reintroduced by Senator Kay Bailey Hutchison of Texas.

Today I am honored to represent the University of Iowa, while at the same time expressing the support of many others in the nonprofit sector, whose programs and services would be strengthened by this proposal. The University of Iowa is a comprehensive public research university providing higher education to 28,000 students from freshmen to advanced residents and postdoctoral fellows.

The University’s 11 colleges graduate 50% of Iowa’s physicians, 80% of its dentists, 60% of its pharmacists, 50% of its baccalaureate trained nurses, K-12 teachers for all of its school districts as well as a high percentage of the state’s leaders and employees in business, industry and other critical areas. In addition, we provide a broad range of services to Iowans, including over 700,000 patient visits per year to our academic health center and community-based clinics.

State support is the foundation upon which all this is built, but I must tell you that it provides only 21% of the University's $1.5 billion budget. A crucial part of the remainder comes through donations from loyal friends and alumni. These funds provide support for facilities, equipment, student aid, the recruitment and retention of outstanding professionals and for centers and programs that would not be possible otherwise.

Our University of Iowa Foundation, a private 501(c)(3) organization is in the midst of the most ambitious comprehensive campaign in its history. Major gifts lead the way and are well recognized. Less well known are thousands of other gifts providing a much broader base of support for the University. IRA funds represent a resource that could significantly enhance private support.

Prospective donors often ask our foundation about tax implications of donating from their IRA’s to become a part of the University’s future. Our advice is always to seek their own financial counsel appropriate to their own situations. We know that tax implications are not the only motivations people have for private giving, but we also know that the tax code may influence the timing and amounts of giving.

According to the Employer Benefit Research Institute (EBRI), there is currently more than $1 trillion in IRA accounts and $5 trillion in defined contribution accounts, which can be rolled into IRA accounts. In addition, economists estimate that more than $41 trillion dollars in wealth may be transferred among generations over the next 55 years. One result of this large generational transfer is that, for many individuals, IRA funds accumulated under favorable market conditions will be only one part of their overall retirement assets and, at least in part, available for charitable giving.

Under current law, withdrawals from regular IRAs are fully taxable as ordinary income to the individual in the years they occur. A donor who withdraws regular IRA funds and uses those funds to support a charity is subject to tax on the entire amount, offset to varying extents by the charitable deduction. If an individual does not itemize on his or her income tax return, no charitable deduction can be taken.

At the same time, current tax laws encourage individuals to liquidate their IRAs during their lifetime since their estates will face confiscatory tax rates of up to 80% if their IRA funds are left to a dependent or family member (other than their spouse). Under current law, any amounts left in an IRA when an individual dies may be taxed as income to the beneficiary, and are also considered assets for the purposes of calculating that individual’s estate tax liability.

Two University of Iowa donors provide illustrative examples of the dilemma many potential donors face. Both people are professionals who are longstanding friends of the University. Both have given substantial gifts to the University over many years. Both are interested in giving a final substantial gift to University programs of special value to them. Both have indicated that they have provided for their families and will not need their IRA’s for retirement purposes. However, the IRA’s are the only asset left to them to make a gift of the magnitude that they would like. Both have indicated that they do not wish to make this contribution unless current law is changed.

In contrast, given passage of the IRA Charitable Rollover Incentive Act (S. 205), if IRA funds were rolled over to charity as an outright gift, they would be excluded from the donor's calculation of taxable income. In addition, if IRA funds were rolled over to create a life-income gift, the annual income payments from the gift would be subject to taxation. In both cases, the donor would not receive a charitable deduction unless after-tax dollars had been contributed to the IRA.

This proposed legislation is good public policy. Since other qualified retirement plans can now be rolled over tax-free into IRAs, this proposal would unlock substantial new resources for the support of charitable organizations and their public-service missions. To the extent that donors transfer IRA funds into life-income gifts after age 59_, rather than waiting until the required distributions at age 70_, this proposal may accelerate the collection of tax revenues, partially offsetting revenue losses.

Although IRA funds were originally intended as a supplement to retirement income, withdrawal is now allowed in order to assist in financing a home or a college education. It is equally appropriate for public policy to allow financially successful individuals to use those assets not for their personal benefit, but to support charities that better the lives of others. Moreover, in the case of life-income gifts, a portion of the IRA funds would be retained as retirement income for the donor and his or her spouse alone, with the remainder passing to charity upon the death of the participants. Since an IRA may now pass to charity at death by a direct or life-income gift, the proposal parallels the current tax code.

Some may incorrectly characterize S. 205 as a tax break for the wealthy. The plain fact is that many middle-class Americans, including teachers, nurses, sales persons, retired military, and librarians, frequently express their desire to make gifts using IRA funds. These donors want the removal of a tax disincentive, not a tax break, in order to complete their charitable objectives. Indeed, upper-bracket taxpayers can best afford, and are most likely to make, this type of wealth transfer to charity. However, if this proposal were passed into law, although the government would give up a tax worth 39.6% of the value of the asset, the donor would give up 100% of the asset. The government would not collect tax on the transfer of the asset to charity because the transfer does not financially benefit the donor. Thus, there is no income on which to levy a tax. Rather, this untaxed asset transfer will increase private support for public services that the government may otherwise be called upon to provide. Therefore, it is good public policy to create incentives that encourage individuals, including upper-bracket taxpayers, to support philanthropy through gifts of IRA funds.

The future of the charitable sector and of the public services it provides depends upon securing the financial resources to meet our pressing social needs. This proposal would allow individuals, who have assets in excess of requirements for their retirement, to make penalty-free donations of IRA funds to support the charitable sector and its public-service mission. I urge you to approve this critical policy initiative.

Thank you for the opportunity to appear before you today.