Debate about the House’s “big, beautiful” tax bill has focused on big-ticket entitlement items such as Medicaid and food stamps. But the sprawling legislation includes consequential changes affecting one of America’s most distinctive characteristics: charitable giving.
The United States has long been the world leader in charitable giving as a percentage of GDP, but, more recently, individual giving has stalled, as overall philanthropy has kept pace because of foundation and corporate giving. The House bill includes a strong push in the other direction — in favor of what can be called the democratization of charity by restoring a tax incentive for those who do not itemize their tax returns. It does so, however, at the possible expense of foundation philanthropy — a change that will meet pushback but nonetheless merits serious consideration in the form endorsed by the House, though the Senate could still improve on it.
The specifics are these: The “big, beautiful bill” includes an “above-the-line” charitable tax deduction of $150 for individuals and $300 for couples, at a likely “tax expenditure” cost to the Treasury of some $6.9 billion.
In effect, this would mitigate an unfortunate trend: Charitable giving has arguably become a luxury good, the result of the fact that since the 2017 tax law, 93% of taxpayers used the standard deduction. Because they don’t itemize their tax returns, the charitable deduction has been of no use to them. Only the most affluent, clustered in a few states such as New York and California, had a tax incentive to give.
That may help explain a notable trend: Overall itemized giving, although it hit a record $557 billion, declined 2.1% adjusted for inflation. Individual giving, as adjusted, fell even more, by 2.5%. “Above the line” means all taxpayers will get at least a modest reward for their giving, and it will likely increase overall charitable giving, an important support for civil society and those of us who believe not all forms of assistance should come from the government.
The tax bill, however, helps to “pay for” that change by notably increasing the excise tax on investment income earned by foundations. What has been a flat 1.5% will go up, though it would do so incrementally: The rate will rise to 10% for foundations with assets of more than $5 billion, 5% for those between $250 million and $5 billion, 2.8% for those between $50 million and $250 million, and remain at 1.4% for those with less than $50 million. The Council of Foundations has pushed back hard against the proposal, pointing to possible cuts in grantmaking. “At a time when nonprofit organizations face enormous financial challenges, the tax bill would make it even harder for organizations to serve their communities and fill the gaps unmet by local, state, and federal governments.”
But there’s another way to look at this — as a push to balance individual and professionally directed giving. There are only 12 U.S. foundations with assets of more than $5 billion. They include some of the best-known, including Gates, Ford, Bloomberg, and MacArthur. Most are considered to lean progressive, and that may be part of the bill’s motivations.
It’s worth recalling that, as a Senate candidate, Vice President JD Vance described the big foundations as a “cancer” and suggested their assets be “confiscated.” An excise tax hike can be seen as a step toward making good on that threat. Still, some of the most left-leaning, including the Rockefeller Foundation and George Soros’s Open Society Foundation, would not be among the group hardest hit.
There is no doubt, as per the Council on Foundations, that an increased foundation excise tax will leave less for grantmaking. But that doesn’t mean that foundations need to cut back. In recent years, as tracked by the group Foundation Mark, foundation assets have sharply increased — by 17% or $230 billion over the course of 2023 and the first quarter of 2024. Total assets reached a record high of $1.55 trillion. The proposed excise tax increase would be modest, by comparison, increasing foundation taxes from $805 million to $3.71 billion. An excise tax hike need not reduce giving, at least for the wealthiest.
For those foundations with fewer assets, however, such as those between $50 million and $250 million, doubling the excise tax would hit hard. The Senate, as it considers its own version of the “big, beautiful bill,” should look to focus on the largest foundations. An increased excise tax on them would have the added virtue of reducing, over time, their overall assets and encouraging them to forgo “perpetuity” — that is, continuing to operate long after their original donor has died.
Notably, the Gates Foundation has announced that it will “sunset” by 2045 — a decision that means its grantmaking over the next two decades must sharply increase. Perpetuity, inevitably, raises questions about foundation legitimacy, as paid professionals, with no link to the original donor, set grant priorities.
THE SENATE CAN IMPROVE THE ‘BIG, BEAUTIFUL BILL’
The higher excise tax is in the tradition of the 1969 Tax Reform Act, sponsored by Sen. Albert Gore Sr., that mandated a minimum annual foundation payout of 5%. The idea that foundations face such standards actually helps ensure their democratic legitimacy — as might the prospect that they will, over time, “sunset,” as per Gates.
To the extent that the new tax bill shifts the charitable balance back toward people and pays for doing so with the foundation excise tax, it can be characterized as a way to use the tax code to redemocratize charity.
Howard Husock is a senior fellow in domestic policy studies at the American Enterprise Institute.