The Steem Improvement Proposal involves donations to the DAO treasury (transfer to @steem.dao), not to a specific proposal. The treasury funds are then available for funding proposals, as long as those proposals are approved by voters (currently there are six active proposals being funded; you can see them here: https://steempeak.com/proposals)

The DAO treasury is held in the form of SBD, and currently holds 234241 SBD. You can see it here: https://steemitwallet.com/@steem.dao/transfers

Currently it is only allowed to donate (transfer) SBD. This proposal is to also allow donations in STEEM, which would be instantly converted into SBD at the current exchange rate. Yes, the STEEM would be removed from active supply and certainly from the amount of STEEM in circulation, although it remains part of the total supply, since SBD counts as supply too.