A powerhouse coalition of wealthy individual donors, some of the nation’s largest private foundations, and prominent scholars on charitable giving Tuesday joined forces to urge Congress to adopt a set of tax proposals intended to speed up distributions from foundations and donor-advised funds.
The new effort, called the Initiative to Accelerate Charitable Giving, was developed by the billionaire philanthropist John Arnold and Boston College law professor Ray Madoff. Among those joining the call on Congress to act: the billionaire investor Seth Klarman and his wife, Beth; the Giving Pledge donor Kat Taylor; and the heads of the Ford, Kellogg, and Kresge foundations.
The proposal has been in development for more than a year, and the recession has made the need for it clearer than ever, supporters say.
“The pandemic added more urgency to this, absolutely,” Madoff said.
Benjamin Soskis, senior research associate at the Center on Nonprofits and Philanthropy at the Urban Institute, said the coalition of support for the proposal is unprecedented. “Historically foundations have been allergic to any sort of government regulation of their payout and spending practices,” Soskis said. “This is an important step in philanthropic reform.”
Soskis said the presence of big foundations on the list of supporters will give the proposals a boost in Congress.
The proposal would reduce or eliminate the excise tax that foundations must pay if they speed up distribution of their assets to charities and create new rules for donor-advised funds intended to accelerate payout of those funds as well.
Arnold, who made a fortune as an energy trader at Enron, has long been a proponent of making changes in the law that would curtail the “tax-free hoarding” of charitable assets in foundations and donor-advised funds. Arnold said the proposals are intended not only to get more money to charities in need but also to make philanthropy less “elitist.”
Wealthy donors can enjoy the immediate tax advantages of establishing family foundations or making big deposits in donor-advised-fund accounts, Arnold said, while the 2017 tax law essentially eliminated the financial incentives for millions of lower-income taxpayers to give to charity. That’s because the tax law doubled the standard deduction. In 2019, about 14 percent of taxpayers itemized, compared with 31 percent before the tax law was enacted, according to the Tax Foundation.
“Fewer and fewer people are getting a tax deduction for their philanthropic endeavors,” Arnold said. “So you have the government subsidizing the wealthiest philanthropists but not lower- and midtier givers. I don’t think that’s healthy for the field.”
Arnold said the push to persuade Congress to make tax-law changes that would spur more giving from foundations and wealthy individual donors is in its “quiet phase,” and he expects more prominent donors to add their public support soon.
“Every week we’re getting people from across the whole spectrum who are joining the coalition,” he said. “I expect that momentum to continue.” John Arnold’s wife, Laura Arnold, also is a signatory on the proposal.
Madoff said she also expects more prominent philanthropists and foundations to join the call for Congress to act. And she’s expecting the plan to get traction on Capitol Hill, although she declined to name legislators who might be interested in pushing it.
Seth Klarman cited flaws in the tax code as the reason he wanted to see changes.
“Each of us in the philanthropic community has a role to play, especially now, to make sure charities have enough resources to address the crises we face today and to meet future challenges,” Klarman said in a statement.
Other wealthy supporters of the proposal include Bill Lewis, managing director of Lazard; California technology-industry veterans David and Jennifer Risher, creators of the #HalfMyDAF” movement; and real estate developer Melanie Lundquist.
Prominent scholars supporting the effort include Rob Reich of Stanford University and law professor Roger Colinvaux of Catholic University of America.
Prospects in Congress
Dean Zerbe, a former senior counsel to the Senate Finance Committee, said he agrees the proposal could get serious bipartisan attention in Congress. The current rules governing private foundations and donor-advised funds create enormous tax benefits for the wealthy “that don’t amount to a hill of beans for the poor,” he said.
Foundations generally must distribute at least 5 percent of their assets annually. Donor-advised funds have no such rules about how much to give or when, yet donors get immediate tax benefits for their full distribution.
Zerbe said that private foundations and donor-advised funds have become “a jobs program for money managers,” adding, “Ray is very well respected. What she puts out gets considered.”
But Jeffrey Moore, chief strategy officer for Independent Sector — which lobbies for the interests of both grant makers and grant recipients — disagreed and said he didn’t see much appetite in Congress for the type of changes being proposed. “Ray Madoff and John Arnold have been making pretty steady attempts on the Hill to socialize their proposal, but we don’t see anything gaining real traction at this point,” Moore said.
Still, that could change if wealthy donors make a strong advocacy push. Taylor and her husband, Tom Steyer, signed the Giving Pledge, and Taylor says she is pushing her network of wealthy donors to advocate for the changes crafted by Arnold and Madoff.
Some donors, she says, are unaware that they even have donor-advised funds; they were created as part of a broader tax-planning process. Others, she says, have long enjoyed the prospect of encouraging their children and grandchildren to develop philanthropic habits and see an intergenerational fund as a way to keep giving in the family.
Taylor, who last month announced she is going beyond her Giving Pledge commitment to give one-third of her wealth to help nonprofits in financially struggling areas build assets, is confident her conversations will bear fruit. One of her main arguments is that getting a tax deduction for a charitable gift, even if that gift does not flow to a working charity for years, deprives government of tax revenue needed for public safety, education, climate-change mitigation, and other issues.
“I have a lot of friends who are rethinking their strategy,” she says.
Meeting of the Minds
In September of last year, Arnold published an opinion article in the Chronicle of Philanthropy calling for changes to federal policies that would spur more giving. Madoff said that article prompted her to reach out to Arnold, and the two had a productive “really in the weeds” conversation about what kinds of changes to current law might accomplish their goal.
The two of them hosted a gathering in January of about a dozen foundation leaders, philanthropists, academics, and others interested in the issue, Madoff said. She declined to disclose the other attendees. That meeting led to the formation of the proposal and efforts to bring more people together in support.
Assets held by foundations and donor-advised-fund accounts have grown rapidly in recent years. John Seitz, a former Wall Street portfolio manager who now tracks foundation assets, estimates that U.S. foundations currently hold about $1.1 trillion in assets. The National Philanthropic Trust says donor-advised-fund accounts hold about $121 billion.
So you have the government subsidizing the wealthiest philanthropists but not lower- and midtier givers. I don’t think that’s healthy.
The growth of those assets has deepened a rift in philanthropy between people like Madoff and Arnold, who want Congress to take action that would send more money to working charities, and powerful entrenched players who oppose those efforts. Some foundation leaders say boosting their annual payout requirement would hurt their ability to handle future crises.
“Whatever crises we are facing now, there will be subsequent crises,” said Adam Falk, president of the Alfred P. Sloan Foundation. “If you pay out more than 5 percent, you cannot responsibly assume you will sustain the future of the foundation and its work.”
Falk added: “We have to be really humble about our ability to see into the future.”
Falk said that avoiding the excise tax wouldn’t be enough of a financial incentive for foundations like Sloan to boost its payout to 7 percent annually.
Community foundations, many of which sponsor donor-advised-fund accounts, also have generally opposed tighter regulations or payout requirements. In a statement, Madoff and Arnold said they were engaged in discussions about how to shape the proposal to take into account the needs of those regional grant makers.
Meanwhile, commercially affiliated donor-advised-fund account sponsors like Fidelity Charitable have traditionally opposed payout rules.
Sandra Swirski, a lobbyist who is an adviser to several national, regional, and state-based philanthropy-serving organizations, said she is concerned that efforts to impose new rules on donor-advised funds and foundations, which she called misguided, could pick up steam among lawmakers.
“Can an uninformed populace drive legislators to change laws? Absolutely,” she said. “That’s the thing in Washington — it’s garbage in, garbage out. We want policy makers and lawmakers to be fully informed and then let them make the judgment call.”
Among the flaws in the proposal, Swirski said, is the provision aimed at curtailing transfers from foundations to donor-advised funds. Such transfers can be an efficient way for grant makers to collaborate, she said.They also can be helpful when foundations support causes that are controversial by protecting their employees who could be targets of harassment or violence, Swirski added.
But Anna Fink, executive director of the Amalgamated Foundation, which manages donor-advised-fund accounts, expressed openness to the charitable-giving plan, saying its goals should be viewed as a “floor, not a ceiling” for donors. Amalgamated has already asked donors to pledge to distribute more than 10 percent of their assets to charity each year, and more than 95 percent of the nonprofit’s donors have taken the pledge.
“Wealthy people have received tremendous tax benefits over the last generation, and their wealth continues to expand,” said Fink. “What we need to do as a philanthropic sector is to challenge and encourage donors to give back generously, not to sort of tweak the tax benefit and the calculation around it.”
A challenge for policy makers looking to encourage speedier giving to charities through donor-advised funds is to avoid making policies that prompt donors to avoid charitable giving altogether, says Hali Lee, founder of the Asian Women Giving Circle.
Lee, who is also co-founder of the Donors of Color Network, says Madoff and Arnold found a good balance between retaining tax incentives for giving while moving more money to working charities.
“They thread the needle pretty well,” she says. “I don’t think we should over-legislate what individuals do with their money. Wealthy individuals could park all of their money in Bermuda.”
Moore, of Independent Sector, didn’t rule out his organization’s support for some changes to how donor-advised funds function, but he urged caution against major changes that could fundamentally disrupt how they operate. “They bring a lot of money into the sector, and we don’t want to turn that upside-down,” Moore said.
