The tax bill released by House Republicans on Monday calls for escalating taxes on investment income at the nation’s foundations and universities, which means the richest foundations and universities would pay by far the highest rates.
The excise tax on endowment income at foundations would stay at 1.39 percent for foundations with $50 million in assets or less, but it would double — to 2.78 percent — for foundations with assets of $50 million to $250 million.
Foundations with assets of $250 million to $5 billion would pay 5 percent, and foundations with $5 billion or more would pay 10 percent.
Using charity tax information from Cause IQ, which collects nonprofit data, the Chronicle identified roughly 2,600 private foundations with assets of $50 million to $250 million, about 720 with assets of $250 million to $5 billion, and 23 with $5 billion or more in assets.
One example of how the tax could affect spending: For the $77 billion Gates Foundation, a year in which net investment income totaled 6 percent of assets would lead to a tax bill of more than $460 million.
These new taxes and many others are designed to help cover the cost of extending the 2017 tax cuts on individuals and corporations. The provisions could change when the Ways and Means Committees takes up the bill before sending it to the full House and ultimately to the Senate.
In a statement, Kathleen Enright, president of the Council on Foundations, said Congress should “protect — not penalize” — private foundations.
“Ultimately, this tax will hurt those who can least afford it: the people and places that rely on charitable support to weather today’s challenges and prepare for tomorrow,” she said. “That’s because aggressively taxing charitable foundations doesn’t just restrict today’s giving, it also reduces the resources available to support local organizations through future crises.”
The Philanthropy Roundtable, which has many conservative foundations as members, was equally critical, questioning the approach of Republicans who typically champion small government.
“Allowing the IRS to snatch charitable dollars out of communities and the hands of Americans in need and instead funnel those dollars to the U.S. Treasury to pay for Uncle Sam’s out-of-control spending habit is not something that advocates of limited government and individual freedom should get behind,” Christie Herrera, the roundtable’s president, said in a written statement.
The bill includes additional provisions that will be strongly opposed by nonprofits. It revives language from last fall’s controversial “stop-terror financing” legislation that would allow the Treasury Secretary to unilaterally designate a nonprofit as a “terrorist supporting organization.” The bill would also tax transportation and parking benefits at nonprofit organizations and cut spending on Medicaid and food-assistance programs.
“This legislation will move fast, and we need to quickly and forcefully oppose these and any other harmful provisions in the bill,” Diane Yentel, president of the National Council of Nonprofits, said in a statement.
The bill makes a modest effort to stimulate more giving among everyday donors by reinstating an “above the line” deduction for taxpayers who do not itemize. But the amounts are limited to $150 for individuals and $300 for couples — half the amounts that were available in 2021.
The bill also sharply increases the tax that the richest colleges and universities would pay on their endowment income. It would create a sliding scale in which colleges with endowments worth $500,000 to $750,000 per student would continue to pay the current tax of 1.4 percent, but wealthier institutions would pay much higher rates, peaking at the corporate tax rate of 21 percent for the handful of universities, such as Princeton and Yale, that have more than $2 million in endowment per student.
John Griffith, a director at Hirtle Callaghan, an investment firm that helps colleges manage endowments, said in a recent interview that many wealthy universities provide among the most generous financial aid in the country, often covering the full demonstrated financial need for low- and even middle-income students whose families make up to $200,000 per year.
“Every time you tax an endowment, that’s a dollar that’s not going to students,” he said. “Fifty percent of all endowments are dedicated to financial aid.”
He and other higher-education advocates had feared that Congress would lower the threshold for taxing endowments to $250,000 per student and were likely relieved to see the minimum threshold maintained at $500,000 per student.
The bill would also change some provisions for the tax on unrelated business income (UBIT) at nonprofits. For example, any sale or licensing of a name or logo would now be treated as unrelated business income and subject to tax.
The new provisions were praised by Scott Hodge, a tax analyst who has called for taxing the majority of revenue flowing through the nonprofit world. In a report released last summer he pointed out that AARP, a 501(c)(4), earned nearly $1 million in tax-free royalty income in 2019. Hodge has also called for taxing nonprofit hospitals and credit unions, but neither of those ideas ended up in the tax bill released Monday.
Lawmakers “did what they had support for and what could be defended,” Hodge wrote in a text message. “Yes, it would have been nice to include credit unions and hospitals, but taxing royalties is a huge step and will set the stage for more UBIT reforms in the future.”
