Congress Should Measure Twice and Cut Once on Charitable Sector Reform

The House GOP's ill-considered excise tax hike on foundations would put these institutions – and the pluralistic charitable sector they support – on a slippery slope. Nothing good lies at the bottom.

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I have a post on the AEIdeas Blog today entitled “The Power to Tax Foundations Is the Power to Destroy Them.” It contends that the steep tax increase on larger foundations’ investment income included in the “One Big Beautiful Bill” now making its way through Congress is unwise, for several reasons. Let me summarize them here.

First and most important, the populist and partisan spite driving this proposal, through which House Republicans are seeking to punish large-scale and left-leaning philanthropy, is inconsistent with our system of ordered liberty. The GOP Majority on the Ways and Means Committee can castigate foundations as “massive non-profits that resemble hedge funds and pay their employees huge salaries” all it wants. But Congress should not impose taxes on civil society actors because a narrow majority of lawmakers disdains the viewpoints of the institutions that will pay the brunt of them.

Second, the provisions will lead to shrinking endowments and reduced grant-making budgets. Civil society will have fewer resources at its disposal as a result.

Third, the provisions will come back to bite even right-of-center foundations. To be sure, there are very few of them among the two dozen largest foundations with endowments over $5 billion that would thus pay the new top tax rate of 10%. But there are many more mid-size conservative, libertarian, and MAGA-friendly foundations that would see their excise taxes increase sharply. They are not happy about it.

Moreover, you can bet that the next time we have a Democratic president and Congress, they will seek to retaliate against their perceived opponents in philanthropy. You don’t have to watch MSNBC to imagine their arguments: “The right-wing fat cats behind Project 2025 have squirreled away tens of millions in their foundation endowments. They all should pay the same 10% tax rate that the GOP has imposed on our allies!” What is good for the goose is good for the gander.

Fourth, in an unintended but perfectly predictable outcome, the foundation excise tax hike will divert more and more wealthy donors’ contributions into vehicles that – unlike private foundations – have no payout requirements, allow for much less transparency, and are not subject to the excise tax.

Dana Brakman Reiser and Steven A. Dean aptly refer to these alternatives as “for-profit philanthropy.” They include LLCs like the Chan-Zuckerberg Initiative and the Emerson Collective. They also include the donor-advised funds or DAFs that both individuals and foundations can take advantage of at financial institutions like Fidelity and Vanguard. This would not be the first time that a hasty bid by Congress to tax activities it dislikes pushes them further out of reach and the public eye.

I find Reiser and Dean persuasive on the growing need for Congress to revisit and update what they term the “Grand Bargain” embodied in the Tax Reform Act of 1969. It provided a reasonably comprehensive and sturdy policy framework for philanthropy and the charitable sector writ large. But 56 years on, the durability of this settlement is melting in front of us. The proposed excise tax increase would hasten its demise.

I thus conclude that,

“Lawmakers should deliberate and decide on how best to accomplish [charitable sector reform] in a holistic way. Until then, an ill-considered tax hike on foundations will do more harm than good.

As John Marshall observed in McCulloch v. Maryland, ‘the power to tax involves the power to destroy.’ Congress must therefore wield it wisely. The House bill puts foundations across the political spectrum—and the pluralistic charitable sector they support—on a slippery slope. Nothing good lies at the bottom of it.”