The Kansas House of Representatives Committee on Taxation is currently considering HB 2208, the Endow Kansas Tax Credit Act. Previous posts offered an overview of the bill’s provisions and criticisms of its text.
But the text of HB 2208 isn’t the only part of the bill that merits criticism. As introduced, the bill suffers from two policy problems: a credit rate that is overly generous and defective eligibility rules. In addition, this post summarizes two other policy considerations for the Legislature: excluding DAFs and imposing additional financial-eligibility rules.
Why 70%?
A 70% tax credit sounds amazing—to a taxpayer. But lower rates would better serve three goals: putting more money in qualifying endowments, enabling more donors to participate in the program, and increasing the impact for every dollar in lost tax revenue.
Qualified Community Foundations benefit from a lower rate
Mathematically, the amount a Qualified Community Foundation would receive (a) is equal to the amount of credit a donor receives (c) divided by the credit rate (r) expressed as a decimal: a = c/r. With a 70% rate, a Qualified Community Foundation receives (1.00/0.7) only $1.43 for every $1.00 a donor receives as a tax credit.
With a 50% rate, the Qualified Community Foundation would receive (1.00/0.5) $2.00 for every $1.00 in credit. At 25% (1.00/0.25), $4.00. And at 10% (1.00/0.1), $10.00.
Put differently, if a Qualified Community Foundation exhausts the per-Qualified-Community-Foundation credit limit for 2026 of (10% of $3 million) $300,000, it would receive the following contributions at the following credit rates:
| Credit Rate | Amount Received ($300,000 credits) |
| 70% | $428,571 |
| 50% | $600,000 |
| 25% | $1.2 million |
| 10% | $3 million |
More donors can participate at lower rates
And recall that HB 2208 also limits how much can be awarded in credits to each taxpayer. Here, too, reducing the credit rate from 70% would have a positive impact. By effectively increasing the price of each dollar in credit, the state would limit the number of people who would—or even could—max out their $100,000 limit, meaning more people could participate in the Endow Kansas program because less of the statewide limit is consumed by the givingest donors.
To illustrate, imagine 30 donors, each of whom gives $143,000 to a qualifying endowment at a different Qualified Community Foundation in 2026. With the proposed 70% credit, these 30 donors each receive $100,000 in credit, and no one else can receive a credit for the year. But if the credit were 25%, each of these donors would receive a credit of $35,750, and there would still be more than $1.9 million left in the statewide limit for other donors to take advantage of.
The state maximizes the impact of lost revenue with lower rates
The state’s interest in maximizing the impact of each dollar in revenue lost through Endow Kansas tax credits is also better served by lower rates. This is so for the same reason that community foundations are better served by lower rates: lower rates mean the credits cost more, leading to more money being donated to qualifying endowments per dollar in credit.
Looking at the statewide limit, we can construct a table similar to the one above that used the per-Qualified-Community-Foundation limit, showing the total amount donated to qualifying endowments at varying credit rates if the statewide limit ($3 million for 2026) is exhausted:
| Credit Rate | Amount Donated ($3 million credits) |
| 70% | $4.3 million |
| 50% | $6 million |
| 25% | $12 million |
| 10% | $30 million |
This point is especially important when contributions are being driven to endowments. In an endowment, only a small fraction of the fund balance is made available for charitable uses each year. The rest is invested to grow over time. How much an endowment can spend, how much is invested, and how much it can earn are all positively impacted by increased contributions to the endowment.
In community foundations, how much of an endowment is available to spend each year is typically determined by a spending policy. According to the 2023 Council on Foundations-Commonfund Study of Foundations, the average spending-policy rate for community foundations nationwide was 4.5%. That is, the average community foundation makes only $0.04½ of every $1.00 in an endowment available to spend each year.
Consequently, for every dollar the state would lose by implementing HB 2208’s 70% tax credit for endowments, it should expect that only $0.06 would be made available for charitable purposes within the next year (that’s 4.5% of the $1.43 the foundation receives for every dollar in credit). Lower credit amounts would lead to higher potential annual payouts from the endowments:
| Credit Rate | Spendable within one year (per dollar in credit) |
| 70% | $0.06 |
| 50% | $0.09 |
| 25% | $0.18 |
| 10% | $0.45 |
Gaming the system
As introduced, HB 2208 includes at least two opportunities for gaming the system: control of or influence in the Kansas Association of Community Foundations and the creation of ad hoc affiliates.
The KACF backdoor
HB 2208’s definition of Qualified Community Foundation incorporates two external standards: the Community Foundations National Standards and the guidelines for membership in the Kansas Association of Community Foundations.
From the perspective of Kansas community foundations, the National Standards are objective standards. They are determined by an external organization, and, because they apply nationwide, they are unlikely to be driven by local or regional biases.
But KACF’s guidelines for membership aren’t like that. KACF is a membership organization open to—and ultimately controlled by—Kansas community foundations. KACF’s guidelines for membership could be loosened to make it easier for community foundations to qualify for the Endow Kansas program, or they could be tightened to squeeze out disfavored community foundations.
There’s no good reason to give such power to an outside organization. If KACF’s current guidelines impose a restriction that the Legislature considers beneficial, it should simply impose that restriction directly in the bill’s text.
The affiliation game
The Endow Kansas program’s per-community-foundation limit of 10% is a facade. At first glance, it seems like a good way to ensure the benefits of the Endow Kansas tax credit are spread throughout the state. But the carveout for community-foundation affiliates undermines that effect.
Consider the Central Kansas Community Foundation (CKCF). CKCF’s website lists 17 “Area Community Foundations” as affiliates. Almost all of them are within 50 miles of CKCF’s headquarters in Newton, Kansas. Yet, because CKCF and each of its affiliates would be separately subject to Endow Kansas’ 10%-per-Qualified-Community-Foundation limit, the entire statewide limit on credits could benefit only donors to CKCF and its affiliates.
Every community foundation in the state would stand to benefit from thoughtlessly launching new affiliates for every township, water district, or strip mall in its region, regardless of whether such an affiliate would be sustainable.
In fact, because (on my reading of HB 2208) affiliates don’t need to be separately certified by the state and typically aren’t standalone entities anyhow, an affiliate’s lack of sustainability might be an advantage. The parent community foundation could spin up a local affiliate on a whim to accommodate donations beyond its own 10% limit, then shut down the affiliate after the year ends, reclassifying the recipient field-of-interest or unrestricted endowments as funds of the parent community foundation with as little effort as a handful of clicks in its accounting software.
Optional financial limits on fund eligibility
In part 2 of this series, I referred to the definition of “endowment fund” found in Kansas’ version of the Uniform Prudent Management of Institutional Funds Act (UPMIFA). There, I stated that “[i]gnoring UPMIFA’s provisions risks unwittingly imposing new substantive requirements on those endowments that community foundations want to be eligible for the Endow Kansas program.”
Of course, the Legislature needn’t impose such substantive requirements unwittingly; it could intentionally do so in pursuit of its own goals in enacting the Endow Kansas tax credit.
Minimum and maximum spending policies
Take community foundations’ spending policies, for example. As noted earlier, the average spending policy nationwide for community foundations is 4.5%. The Legislature could decide that only those endowments that are subject to a spending policy of at least 5%—or any other minimum threshold chosen by the Legislature—are eligible to participate in the Endow Kansas program.
(As it happens, 5% is the minimum amount that federal law requires private foundations—as opposed to community foundations, which are public charities—to distribute each year.)
The Legislature could also impose a maximum spending policy or specify a range within which participating endowments’ spending policies must fall. An optional provision of UPMIFA makes distributions in excess of 7% presumptively imprudent. Kansas has not enacted that provision, but it could impose that limit on endowments participating in the Endow Kansas program.
Limits on administrative fees
A community foundation’s spending policy determines how much it makes available for distribution from its endowments to further the endowments’ purposes each year. How much it takes from its endowments for itself is determined by its administrative fee.
The Council on Foundations-Commonfund Study of Foundations referenced above reports that in 2023 “the average fee charged was 99.3 basis points of endowed [assets under management],” or 0.993%. The median fee charged by each size cohort of community foundations was 100 basis points—1%.
Some community foundations take their administrative fee out of their endowments’ spendable amounts. Others take it in addition to the spendable amount. Assuming a 4.5% spending policy and a 1% administrative fee, the table below shows how that choice affects the portion of annual endowment distributions being used for charity vs. community-foundation overhead.
| Admin fee reduces spendable | Admin fee does not reduce spendable | |
| Max. annual charitable distributions (per $1.00 fund balance) | $0.035 | $0.045 |
| Annual admin distribution (per $1.00 fund balance) | $0.01 | $0.01 |
| Max. total annual distributions (per $1.00 fund balance) | $0.045 | $0.055 |
| Min. admin portion of annual distributions | 22% | 18% |
| Min. admin to charitable distributions ratio | 1:3.5 | 1:4.5 |
This table shows that with a 4.5% spendable policy and a 1% administrative fee, around 20% of annual distributions from an endowment are paid to the community foundation for administering the fund.
This represents another opportunity for the state to impose substantive limitations on endowments participating in the Endow Kansas program. The Legislature could require that administrative fees for participating endowments not exceed 1% of the fund balance, for example. Or it could require that the spendable amount for an eligible endowment be at least some specified multiple of the administrative fee the fund is subject to.
It could even impose such rules only with respect to donations for which donors are allocated an Endow Kansas tax credit. That would require community foundations to undertake some additional steps to properly account for such donations, but that seems like a minor inconvenience in comparison with the benefits of participating in the Endow Kansas program.
How should DAFs be excluded?
The Endow Kansas program is supposed to be open to only field-of-interest and unrestricted endowments. But, as I pointed out in my critique of HB 2208’s text, its definitions of those fund types encompass pretty much any kind of endowed fund at a community foundation—”[e]ven donor-advised funds (DAFs).”
To exclude donor-advised funds, the Legislature would need to define the term, and defining donor-advised funds is trickier than it might seem at first.
The obvious approach would be to adopt the federal definition of donor-advised funds, but that definition has proven controversial.
In November 2023, the IRS proposed new regulations interpreting the definition of “donor advised fund” in 26 U.S.C. § 4966. Under those proposed regulations, as the Treasury Department’s explanation puts it,
the IRS generally would regard service on a committee of a [DAF] sponsoring organization that advises as to distributions from or investments of assets of a fund or account as a form of advisory privilege with respect to that fund or account in determining whether the fund is a DAF[.]
The regulations offer the following example (among others):
Fifteen unrelated individuals establish Fund Q at sponsoring organization T. Each individual contributes to Fund Q, and these individuals constitute a committee appointed by T to advise on investments and distributions from Fund Q. T regularly issues a statement to one of the committee members (who shares the information with the others) showing the account balance and any transactions with Fund Q. Fund Q is a donor advised fund.
This example describes what is commonly referred to as a “giving circle.” I think most community foundations would regard giving circles as field-of-interest funds, and they would consider both giving circles and field-of-interest funds more generally as distinct from donor-advised funds.
They said as much in their comments on the proposed regulations. Of particular relevance in this context, here’s what the Kansas Association of Community Foundations had to say:
The proposed DAF regulations may inadvertently include other types of funds, such as field of interest or designated funds, as DAFs. Many giving circles are established as such fund types by multiple, unrelated donors, who together, share common interests or concerns. . . . These types of multiple-donor funds should be excepted from the definition of a DAF.
The problem is a disconnect between the fund taxonomy that community foundations have adopted (their headcanon) and the federal definition of donor-advised fund.
In short, the state could adopt the federal definition of donor-advised fund, but in doing so it may exclude from eligibility funds that the proponents of HB 2208 expected to qualify.
On the other hand, creating an entirely new state definition would likely only serve to further confuse the issue of which of a community foundation’s funds are donor-advised funds.
The best approach is probably to adopt the federal definition but create special carve-outs for the sorts of funds that qualify as DAFs under federal law but not in community foundations’ headcanon.
Conclusion
In considering HB 2208 or any similar future bill, Kansas legislators should weigh the policy issues raised in this post. By tinkering with the tax rate and new financial restrictions on eligibility, the Legislature can fine-tune the legislation’s ability to advance its own goals. And by thoughtfully drafting definitions and reducing opportunities for circumventing its restrictions, the Legislature can better ensure the program will work as intended.