The nonprofit world breathed a sigh of relief Tuesday when the Senate finally approved the tax bill without language that would have sharply increased taxes on private foundations.
The removal from the House version of the bill was a rare bright spot in legislation that — aside from the creation of a charitable deduction for people who don’t itemize — offers few positives for charities and foundations.
But even on the foundation tax measure, it may be too early to chalk up a win. As the House and Senate race to hammer out a final bill to meet the July 4 deadline set by President Trump, nonprofit lobbyists and foundation officials are working hard to make sure the House doesn’t add the measure back in.
“The goal of the One Big Beautiful Bill Act is to help uplift everyday Americans,” says Elizabeth McGuigan, chief operating officer at Philanthropy Roundtable, a group with many conservative foundations as members that strongly opposes the excise-tax measure. “When you take funds out of causes like work-force development, scholarship programs, and community services, you are literally hurting the people that this bill is seeking to help.”
The original House bill featured escalating taxes on net investment income at the more than 2,600 private foundations with $50 million or more in assets, topping out at a 10 percent tax rate for the 27 foundations with assets of $5 billion or more.
The United Philanthropy Forum estimates that the tax would cost the sector an additional $2.9 billion in the first year — with those 27 foundations picking up two-thirds of the tab.
But many smaller and midsize foundations would also face a doubling or near quadrupling of tax rates. While foundations with less than $50 million in assets would stay at the current 1.39 percent rate, foundations with assets of at least $50 million and less than $250 million would pay 2.78 percent, and foundations with assets of $250 million to $5 billion would pay 5 percent.
An analysis by the Johnson Center for Philanthropy at Grand Valley State University suggests that the measure could have a surprisingly big impact on smaller foundations, especially if the additional tax leads them to scale back grant making out of fear it will make it harder for them to exist in perpetuity.
Many small foundations distribute far more than required by law — in some cases, 15 percent or more of assets each year.
For a foundation with $100 million in assets that distributes 15 percent of its endowment per year, the tax itself might cut grant making by just 3 percent, writes Jeff Williams, the center’s director of consulting services. But if the new tax causes the foundation to “anchor” on the 5 percent required payout rate, it could lead the board to chop its distribution by two-thirds.
Even a more modest retrenchment could have a big impact. The James Graham Brown Foundation, a $410 million foundation that helps support capital projects to improve the city of Louisville and the state of Kentucky, currently pays out about $18 million a year. The proposed tax could cost the foundation as much as $1 million more per year, says Mason Rummel, its CEO. Those funds would likely come straight out of the grant making that the foundation awards to charities that are already suffering due to government cutbacks, Rummel says.
“That’s a pretty big crunch,” she says. “For us, $1 million is a sizable grant to help a major effort either in the state or the city. Logically, it doesn’t make sense to us that this money should be handed over to the government.”
Rumors have circulated that Senate leaders might be willing to revive the private-foundation tax in a trade for an expanded charitable deduction for non-itemizers. But a spokesman for Sen. James Lankford, a Republican from Oklahoma and a champion of the non-itemizer deduction, denied those rumors.
‘This Isn’t Going Away’
Whether or not the new taxes on private foundations end up in the final “Big Beautiful Bill,” the very fact that they’ve been proposed puts foundations at risk moving forward. Congress talked for decades about taxing college endowments before adding a small tax on them in 2017 and sharply expanding the tax in this year’s legislation.
“Even if we get through this process,” McGuigan says, “this isn’t going away.”
Excise taxes on private foundations date to philanthropy reform efforts in 1969. At the time, the proceeds were supposed to pay for IRS enforcement efforts. The tax, currently at 1.39 percent, has always been modest.
Congress has been looking for new sources of revenue to help pay for extending the 2017 tax cuts, but the proposed tax increases on private foundations aren’t a huge revenue generator — just $16 billion over 10 years, according to the Joint Committee on Taxation. The proposed taxes are widely understood to be a Republican effort to rein in large foundations perceived to have a liberal slant.
Tom Riley, president of the $350 million Connelly Foundation, says he can understand why lawmakers might be concerned about the left-wing agenda of big foundations, but he argues that Republican lawmakers should increase IRS enforcement spending if that’s their concern. Connelly spends about $16 million per year on human services, scholarships, and civic renewal in Philadelphia. The foundation often spends as much as 6 percent of its endowment on grant making, Riley says, but it would likely cut back to 5 percent if the new taxes were enacted.
“My understanding is that the purpose of this whole bill is to focus on private-sector solutions instead of government solutions,” Riley says. “How is that addressed by taking money out the charitable sector and giving it to government?”
The National Taxpayers Union Foundation, which advocates for fiscally conservative policies, released a paper this month noting that Republicans’ shotgun approach to reining in liberal foundations would have some collateral damage.
Twelve percent of safety-net grant making at the 15 largest private foundations goes to faith-based groups, which are often favored by Republicans, the paper notes.
“In an attempt to rein in some foundations that aren’t doing great stuff, Congress would be roping in a lot of other foundations that are doing great stuff,” says Joe Bishop-Henchman, the foundation’s executive vice president.
The proposal already has prompted plenty of talk about strategies that foundations might use to avoid the tax. In his paper, Williams suggests that a $249 million foundation with programs focused on service animals and elder care could split into two foundations and avoid a tripling of its tax rates. John Arnold and others have suggested that private foundations would dump their assets into donor-advised funds to avoid the tax.
But some are urging foundation boards to move slowly if the proposal does make it into law. Greg Hayes, a partner at MST, an accounting firm that works with many foundations, notes that the tax increase for most would be modest. And he argues it might well be worth paying rather than handing ultimate control of assets over to the entity that controls the donor-advised fund.
Says Hayes: “You could easily let the tail wag the dog here.”
