Ask the average American what their local soup kitchen, a high-profile think tank, and several multi-billion-dollar hospital chains have in common and they likely wouldn’t know that they’re all 501(c)(3) nonprofits. Nor do many lawmakers fully understand whether those organizations should be considered equals under the country’s tax code, leading to increased scrutiny and calls for reform on Capitol Hill in recent months.
Since the turn of the century, the number of tax-exempt 501(c) organizations has expanded by 36 percent, from 1.35 million in 2000 to 1.85 million in 2023. That growth, albeit driven largely by small apolitical charities, has helped fuel a torrent of controversy about nonprofits’ impact on the nation’s political and economic landscape. And as organizations prepare for the next Congress, a new president, and a likely reassessment of the tax code as Trump-era provisions expire next year, they’re paying close attention to — and trying to shape — what might come next for nonprofits.
“Applying a broad-brush approach could put at risk all organizations, the vast majority of which are doing amazing work uplifting communities and supporting those most in need,” said Jack Salmon, director of policy research at the Philanthropy Roundtable.
In a report released last week, the conservative charitable advocacy group cautions that heavy-handed policy proposals targeting a small number of “bad actors” could have far-reaching ramifications for the entire charitable sector, including changes to nonprofit tax exemptions or a redefining of permissible nonprofit activities. Philanthropy Roundtable, which advocates against most nonprofit regulations and donor-transparency efforts, aimed to demystify the sector’s growth and debunk the notion that a significant portion of organizations take advantage of tax exemptions to funnel money from billionaires and foreign adversaries into political causes.
Despite a small group of politically active nonprofits, experts point out advocacy among most charitable organizations has actually declined significantly in the past two decades. Recent nonprofit growth has stemmed largely from an increase in nonprofits dedicated to providing basic social services — not politics or advocacy — some of which formed in response to the Covid-19 pandemic.
Both Philanthropy Roundtable representatives and other nonprofit experts from groups like Independent Sector and the Council on Foundations point to those statistics to push back on claims from some Republican congressional representatives that recent growth of the sector is due to a growing number of wealthy donors or foreign entities taking advantage of the tax-exempt system to, say, undergird campus protest movements or influence elections.
Contours of Nonprofit Growth
Alongside longstanding frustration with commercially lucrative 501(c)(3)s, the perceived over-politicization of nonprofits has led some policymakers to explore changes to the tax code.
When it comes to everyday charities operating on thin financial margins, policy changes meant to “remedy what these policymakers see as an issue would hurt these types of organizations the most,” Salmon warned.
Over the past 23 years, the country added 500,000 new nonprofits, the vast majority of which are 501(c)(3) organizations. These include groups that most Americans associate with the word charity, like food banks and animal shelters, but also many churches, museums, and hospitals.
Of those new nonprofits, most are dedicated to providing basic social services and community support, with nearly 60 percent of 501(c)(3) growth over the past two decades coming from increases in social-services charities like food banks, homeless shelters, and foster care services.
“It just didn’t really add up,” said Salmon. “If nefarious foreign donors are trying to interfere with U.S. policy, I don’t think they would be funneling money into health care and education.”
Bipartisan Critiques and Calls for Reform
Indeed, experts on both sides of the aisle agree that most nonprofits operate in good faith, leveraging their ability to raise funds from tax-deductible contributions for clearly charitable purposes.
Where that consensus gets tricky is when those tax exemptions effectively subsidize the work of think tanks, advocacy groups, mega-hospitals, or universities in ways that critics say go beyond the scope of regular charity, often along partisan lines.
“Most of what skeptical policymakers label as ‘bad actors’ aren’t bad actors. They’re usually just groups they don’t like,” said Salmon, who noted that historically, “whenever there’s growth in the number of nonprofits, political skepticism from both sides tends to grow.”
In the early 1900s, Congress rejected an attempt by John Rockefeller Sr. to establish his foundation for fear that philanthropic assets were growing too quickly. A boom in the number of private foundations — and skepticism over philanthropists’ motives — post-World War II sparked two decades of scrutiny that culminated in the 1969 Tax Reform Act’s increased regulations on nonprofits.
Today’s calls for change come from across the political spectrum. While conservatives accuse nonprofits of unscrupulous ties to foreign donors and even allege connections to terror financing, progressives have long criticized the wealthy for using 501(c)(4) nonprofits in particular as a backdoor for political contributions. In the leadup to the 2020 election, Democrat-aligned nonprofits spent more than $1.5 billion from undisclosed donors to influence the race while Republican-aligned groups spent at least $900 million, according to an analysis by the New York Times.
“The wealthy have increasingly pushed on the boundaries of freedom of speech and have increasingly won that battle at the Supreme Court” in ways that have weakened the government’s ability to regulate both tax-exempt and campaign finance law, said Phil Hackney, a law professor at the University of Pittsburgh who testified before a U.S. House Ways & Means Subcommittee’s hearing on the tax-exempt sector in December.
Hackney believes the tax-exempt economy requires more regulations, enforcement, and transparency, though he agreed with Philanthropy Roundtable’s assessment that the majority of nonprofits — and nonprofit growth overall — clearly do not engage in political or commercial activities.
Yet as a result of the current system that ultimately flattens these more politically minded nonprofits with more traditional charities, “we end up having the government put its thumb on the scale in favor of very, very wealthy people who don’t have to disclose” their donations to the smattering of nonprofits that toe the line of permitted political activities, he said.
What About 501(c)(4)s?
Many 501(c)(3) organizations have sparked controversy by forming more explicitly partisan 501(c)(4) arms in recent years. While 501(c)(3)s are allowed to engage in some lobbying or advocate for certain legislation, they are not themselves permitted to endorse a particular political candidate or party.
That’s why the Heritage Foundation’s Project 2025 does not mention Donald Trump directly, even as the conservative think tank lays out its blueprint for a right-wing presidential administration. Nor does the Center for American Progress, a left-wing think tank, allude to Kamala Harris in any of its policy papers.
On the other hand, 501(c)(4) organizations have more liberty to engage in some political campaign activities and endorsements and are more often associated with so-called “dark money” contributions, though they are prohibited from forming primarily to support a particular party.
Some 501(c)(3) groups — including the Heritage Foundation and the Center for American Progress — also maintain more explicitly partisan 501(c)(4) arms.
Since 2000, 501(c)(3) nonprofits have grown steadily commensurate with the overall growth in nonprofits, increasing by 85 percent from 819,000 in 2000 to over 1.5 million in 2023, according to Philanthropy Roundtable.
501(c)(4) organizations, which represent about 4 percent of overall nonprofits and include many non-political organizations, have technically shrunk in number since 2000, dropping to around 73,000 in 2023 from a high of 140,000 in the early aughts. Even so, the 2010 Supreme Court decision on Citizens United, a 501(c)(4) that sued for its ability to give unlimited campaign contributions, ushered in a massive increase of partisan 501(c)(4)s eager to take advantage of their unique structural ability to give unlimited campaign contributions without donor disclosure — so long as they comply with a murky requirement that politics not be the organization’s “primary activity.”
As a result, the 501(c)(4)s that persist have attracted controversy in recent years for dramatically increasing the amount of money they spend on political campaigns with little oversight from a disempowered Internal Revenue Service and no legal need to disclose their donors as required of the PACs and Super PACs they often then funnel dollars to.
Trimming Tax Breaks
Those critiques, combined with concerns over the proliferation of deep-pocketed but tax-exempt institutions, have led to a growing interest in nonprofit reform. As the 2017 Tax Cuts and Jobs Act expires next year, leaving uncertainty over how the next administration will shape the country’s tax policy in the years to come, there is no shortage of advocates and critics vying for influence over what comes next.
“Congress should look to shrink the sector such that it is only handling those things which are really core to tax exemption,” said Hackney, who pointed towards nonprofit hospitals and private foundations for exploiting their tax-exempt status while hoarding assets and refusing to engage in sufficient charitable activities. He added that the IRS lacks sufficient resources to effectively oversee such a sprawling and diverse sector.
While details are scarce as to what reforms may ultimately arise from Congress, critics have proposed changes to more clearly delineate permitted political activities, particularly for 501(c)(4)s, and more rigorously enforce laws against politicking that are already on the books. Some critics, like Hackney, go further arguing that the nonprofit sector’s tent has gone far beyond the intent of the charitable tax exemption.
Still others, like Scott Hodge of the Tax Foundation, say that certain sources of nonprofit revenue, reserves, or endowments — including billions held by elite universities and foundations — ought to become taxable, an idea embraced by some Republican lawmakers, but sharply criticized by conservative nonprofit advocates like Philanthropy Roundtable. For years, Donald Trump’s running mate, J.D. Vance, has fiercely criticized elite universities, foundations, and other nonprofit institutions for their large endowments, going so far as to propose they be taxed or required to use 20 percent of their assets for charitable purposes.
Today, many nonprofits are “sophisticated commercial operations that happen to be getting taxpayer subsidies,” said Hodge, who argues that several major nonprofit players, like the NCAA or Kaiser Permanente, earn “business-like income that should be taxed like any business.”
Small Charities, Big Changes
Should new policy target large or politically active organizations, experts say that changes could have consequences for apolitical charities, especially those that do nurse significant reserves.
Those nonprofits should not be penalized for the excesses of tax-exempt outliers, said David L. Thompson, acting CEO and vice president of public policy at the National Council of Nonprofits.
“The issue of taxing reserves or endowments is something that we’ll fight back on,” said Thompson, who noted that “plenty of organizations need much bigger reserves because they’re under attack” or face unpredictable challenges.
Yet, he also acknowledged “legitimate questions” about the tax-exempt status of larger institutions that operate more like businesses than charities or that attempt to blur the lines of permissible political activities.
“It’s incumbent upon charitable nonprofits to demonstrate that they’re charitable,” he said of those larger institutions. “Act like a charitable nonprofit, and we’ll work with you.”
