Worth Reading

Legal and Tax Proposals for Reform

“Charitable Tax Reform For the 21st Century” — 164 Tax Notes 1867 (2019)
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3462163

This is a classic, important article by two of the key architects of the ACE Act. Published in 2019, it begins with two goals that charitable tax incentives were originally designed to further: promoting actual charitable work and fostering a strong culture of charitable giving with broad participation throughout society.

The authors lament two developments that compromise both goals: the increase in the standard deduction and the increasing predominance of donor-advised funds (DAFs). The article sets forth reform proposals to bolster the charitable sector. These include expanding tax incentives to all taxpayers in the form of a credit (subject to a giving floor) and altering the timing of DAF tax benefits so that while certain benefits would remain immediately effective upon establishing a DAF, the income tax deduction would be delayed until the funds are actually granted to charity.

The authors also propose closing loopholes that enable foundations and donors to skirt long standing legal requirements regarding payouts, disclosure and lobbying, among other things. (For example, foundations currently may make grants to DAFs, which in effect nullifies the statutory requirements they would otherwise be required to follow in connection with the granted funds.) In addition, they propose modifying incentives for foundations to encourage them to disburse more than the 5% annual payout required under current law.

The article explains thoroughly how current treatment and deployment of DAFs undermines the goals of our system. It notes that the “ability to opt out of private foundation status at will makes a mockery of our tax system and the complex statutory rules providing different treatment for private foundations and public charities.”

Vice President-Elect J.D. Vance on philanthropic reform 

Nonprofit Reform Campaigns Are Gaining Visibility. Here’s What that Means for Civil Society — by Ben Soskis
www.urban.org/urban-wire/nonprofit-reform-campaigns-are-gaining-visibility-heres-what-means-civil-society

This piece, published just two weeks before the 2024 election – by renowned scholar Ben Soskis – describes Vice President-Elect J.D. Vance’s longstanding antagonism toward progressive nonprofits and foundations, but also his thoughts which parallel some areas in common with liberal reformers:

• the warehousing of philanthropic funds
• philanthropic lack of transparency and
• transgressing the boundaries between philanthropic and political action

In addition, Soskis highlights scholars’ worries that restrictions by authoritarian regimes that are labeled as reforms actually constrict the arena in which free speech is permitted. He cautions that care must be exercised so that domestic reform efforts do not also have that impact.

Gaza Protests Spark Different Fears on the Right and the Left

“Campus Protests, Donor Secrecy, and a Moment for Reform” — by Ben Soskis
www.philanthropy.com/article/campus-protests-donor-secrecy-and-a-moment-for-reform

Widespread campus unrest in connection with the war in Gaza have given rise to concerns over the protesters’ sources of funding. On the right, this unease ties in with longer-term efforts to curb funding for liberal causes and nonprofits viewed as left-leaning. Some of those promoting such restrictions have lauded illiberal leaders abroad such as Viktor Orban, raising alarm on the left and in the center. Meanwhile, bipartisan concerns led to a measure that strips nonprofits’ tax-exempt status if they are found to be supporting terrorists. Soskis points out that the partisan aspects of the discussion should not distract from very real issues of transparency and philanthropy’s role in public life. These questions apply across the board and should be taken seriously despite the fact that previous reform efforts have sometimes favored or furthered partisan objectives.

Calls to reconsider perpetuity in foundations

“It’s Time for Foundations to Interrogate Perpetuity, Even If That Means Spending Down” – by Mike Scutari
www.insidephilanthropy.com/home/its-incumbent-on-foundation-trustees-to-interrogate-perpetuity-even-if-that-means-spending-down

In 2023, 125,000 US foundations held around $1.5 trillion in assets. Yet they disbursed slightly less than $100 billion that year (including grants, expenses, etc). Endowments continue to grow steadily and the vast disparity between that growth rate and the relatively modest amount distributed in grants has attracted attention from both politicians and groups such as Patriotic Millionaires, that call for foundations to increase the five percent payout rate. Even some foundation leaders have decried a culture of hoarding resources.

Scutari notes that at the heart of this discontent lies an “unspoken issue,” which is perpetuity.

The question is whether spending down endowments will deprive grantees and the public they benefit when they face unforeseeable future crises. Those in favor of perpetuity say foundations must protect the resources that will at some point be needed to meet future challenges.

Perpetuity also allows foundations to nurture nonprofit ecosystems, providing funding that adapts to the organizations’ evolving needs and changing circumstances. The alternate view is that we are inundated with crises and critical human needs today, and that withholding funds from addressing current problems such as climate change can even exacerbate them in the long run. Scutari’s research revealed that when foundations spend down by providing grantees substantial amounts with the understanding that there will be no future funding, it initially creates anxiety, yet actually helps fortify organizations in the long run. Advocates of spending down also claim that in the future there will be plenty of people wealthy enough to carry the torch. Scutari concludes that especially in light of other current trends such as reduced giving by middle-income donors, proponents of perpetuity need to do a better job of making their case.

Donor-Advised Funds Grow Share of Giving

“Donor-Advised Funds Now Consume a Quarter of Individual Charitable Giving” – by Helen Flannery
https://inequality.org/great-divide/donor-advised-funds-quarter-of-charitable-giving/

Foundations used to be large donors’ preferred intermediary vehicle to deliver their charitable donations, when not contributing directly to nonprofits. Yet DAFs have now become so popular with donors that in 2022, DAFs accounted for 27% of individual giving. Because DAFs have no payout requirement, this means that vast sums ($86 billion in 2022) can be effectively permanently sequestered, despite having already delivered a tax deduction. DAF sponsors insist the overall payout rate is high.  However, because they report DAF distributions in aggregate, there is no way to tell whether any particular DAF is actively paying out any funds.

Biggest Nonprofits are Donor-Advised Fund Sponsors

“Ten of America’s 20 Top Public Charities Are Donor-Advised Fund Sponsors” – by Chuck Collins and Helen Flannery
https://inequality.org/great-divide/top-public-charities-dafs/

This piece reveals the startling finding that half of the country’s top charities are now donor-advised fund (DAF) sponsors (previously United Way, American Red Cross were frequently at the top). The top three such funds (Fidelity, Schwab, National Philanthropic Trust) are ostensibly nonprofit firms founded by the country’s leading wealth management corporations in response to the ever-burgeoning growth and popularity of DAFs. They earn fees for managing both DAF accounts and the funds they contain.

This phenomenon is troubling because the sponsors’ financial interests benefit more when DAF funds are retained than when they are distributed to charitable organizations. The lack of active distribution problem is exacerbated by the fact that DAFs have no legal requirement to pay out funds at any time, allowing the arrangement to continue indefinitely.

Given that taxpayers subsidize up to 74 cents of every DAF dollar, this issue merits heightened scrutiny and should spur legislative reform, note Collins and Flannery. The reforms they propose would: require DAFs to pay out funds within 5 years of receipt; exclude DAF grants to other DAFs from counting towards payout; require sponsors to report on DAFs on an account-by-account basis; change the tax benefits for DAFs to match those of private foundations; limit the estate tax charitable deduction to a percentage of the estate’s value, with a lower percentage for gifts to private foundations and DAFs; and provide a charitable tax credit for non-itemizers to increase everyday donors’ participation in philanthropy.

Billionaire Philanthropy

“The True Cost of Billionaire Philanthropy” – by Chuck Collins, Helen Flannery and Bella DeVaan
ips-dc.org/report-true-cost-of-billionaire-philanthropy

Top-heavy philanthropy refers to the ever-increasing proportion of U.S. charitable giving coming from those at the apex of the wealthiest donors, which means that those lower on the income scale are donating an ever-lower proportion of charitable funds.

This article explores the nature and impact of top-heavy philanthropy. Many of the top donors signed on to the Giving Pledge (launched in 2010 by Warren Buffett, Melinda French Gates, and Bill Gates), committing to donate most of their wealth to charity. Nearly half of these donors have seen their wealth grow dramatically since they made the pledge, which some are not honoring. Pledgers often give through their own foundations but they are increasingly using intermediaries. And some are blending their giving with for-profit ventures.

All told, depending on how the funds are counted, in 2022 the public coffers lost between $73.34 and $111 billion as a result of tax exemptions issued for charitable giving.

Collins and Flannery recommend a series of reforms to reverse top-heavy philanthropy. For DAFs, these include

• Requiring a payout for DAFs and
• Increasing DAF transparency and reporting

For foundations:

• Increasing the foundation payout requirement
• Capping administrative overhead that can count towards the payout requirement
• Prohibiting grants to DAFs from qualifying toward the payout requirement unless the funds are granted to working charities within one year
• Closing loopholes that allow program-related and impact investments to be considered part of the payout allocation
• Requiring foundation board independence; and
• Imposing a ban on compensating family member trustees

The Story of Chuck Feeney and Atlantic Philanthropies

“Limited Life, Unlimited Impact” – by Chris Oechsli
www.atlanticphilanthropies.org/news/limited-life-unlimited-impact

This piece chronicles Chuck Feeney, who committed his entire $8 billion fortune to supporting strategic philanthropy during his lifetime. The organization he founded, the Atlantic Philanthropies, is currently winding down, having granted all of its endowment to charitable causes, including supporting a roster of fellows. Oechsli describes Atlantic’s approach to investing in the communities it serves as follows: “Passive, inert endowment money–lying dormant in investment accounts visible only on paper financial statements–has been converted into active efforts to improve the lives of others that continue well beyond the dissolution of the foundation.” Because Feeney provided funding that supported grantees’ strength and sustainability, his legacy lies in the abundant public good those organizations provide and in the future ripple effects the organizations’ work will continue to engender.

A Philanthropic Reform Movement Grows

“The Emerging Philanthropic Reform Movement” – by Jan Masaoka
inequality.org/research/philanthropy-reform-movement/
(This piece is excerpted from a longer piece at CalNonprofits.org)

This piece reviews the array of efforts targeted at reforming institutional philanthropy. It covers the overarching issue of what scant resources are actually distributed to charitable causes because of foundations’ requirement to disburse only five percent of their endowments (toward which many other costs besides grants can also count) and DAFs, which need never be distributed.

Masaoka notes that overall the reform efforts are disparate and decentralized. Several are voluntary and have enjoyed some recognition; there are legislative efforts afoot as well. These have not survived at the national level, such as the ACE Act, although several modest inroads have been made at the state level. Yet these have not reached fruition either. The fact that there is such a variety of approaches under consideration illustrates that while we are in the early stages, there are clear signs that reform may well be on the horizon.

Public Support for Philanthropic Reform Crosses Party Line

“New Poll Shows Support for Charity Reform Across the Political Spectrum” – by Chuck Collins and Michael Hartmann
inequality.org/research/charity-reform-poll

The public opinion poll report on in this article describes reports that people across the political spectrum show a high level of agreement on the way philanthropy operates in our society. While few are familiar with the system’s workings, more than 80% of those polled thought (a) wealthy donors should have to report large contributions because of the influence those contributions can have, and (b) taxpayers should not have to subsidize wealthy donors’ creation of legacy foundations. 71% thought foundations should have to distribute 10 percent of their endowments annually rather than the five percent now required. Once the current lack of any requirement to expend DAFs was explained to respondents, nearly 80% said DAFs should be distributed within five years. The notion that lifetime limits on charitable tax deductions should be imposed showed a difference of opinion between right- and left-leaning respondents. Yet even here, the lower level of support (on the right) was 66% in favor of such limits!

White Paper on Philanthropic Reform

“Promise and Peril: Philanthropy at the Precipice” – by Carolyn Karr
inequality.org/research/promise-and-peril-philanthropy
(This piece is excerpted from a white paper found at inequality.org)

Since the founding of the United States, philanthropy has reflected uneasy tensions in our values. Our system fosters generosity among those who have garnered significant wealth through favorable tax treatment. Yet it also demonstrates the peril of the inequality engendered by that same tax treatment.

The two main ways charitable funds are sequestered by donors are

• DAFs, which do not have a time requirement to be put to use for charitable purposes
• Private foundations, which are required to expend only five percent of their endowments annually.

Indeed, the laws governing philanthropy have not kept pace with economic and social changes and are overdue for regulatory reforms designed to help philanthropic funds flow more quickly and abundantly, to make the tax code fairer, to ensure public values are reflected, and to broaden the base of public support for charitable causes. The white paper is correlated with, and attaches, a series of policy reforms addressing these issues. It also examines a range of topics, including social and economic factors, transparency, tax policy and institutional oversight of philanthropy. Karr concludes that our current system limits the benefits philanthropy could deliver and, in some cases, undermines our democracy.

Philanthropy and Democracy?

“Contributory or Disruptive: Do New Forms of Philanthropy Erode Democracy?” – Excerpts and comments by Aaron Horvath and Walter Powell on the book Philanthropy in Democratic Societies edited by Rob Reich, Lucy Bernholz, and Chiara Cordelli
ssir.org/books/excerpts/entry/disruptive_philanthropy

This 2017 Stanford Social Innovation book review remains timely by tracing philanthropy’s potential threats to democracy since the Gilded Age. These concerns initially resulted in greater faith that government could compensate for insufficiently available public goods – a belief that held sway for much of the 20th century. Indeed, the piece focuses on “disruptive” philanthropy, which has emerged in response to failures in the government’s ability to meet public needs. This contrasts with “contributive” philanthropy, which is seen as existing alongside government and other public services, compensating for lacunae and complementing their offerings. Overall, contributive philanthropy seeks to expand the total benefits provided.

Disruptive philanthropy is described as having three distinctive elements. First, it seeks to “change the conversation,” in recognition that because philanthropy’s ability to provide actual services is limited, its efforts are best spent trying to publicize issues and encourage others to intervene along the lines it recommends. Second, it reflects a strong belief in the value of competition. Third, it champions new methods of funding the provision of public goods, such as public-private partnerships and other partners who can take on responsibilities impoverished governments can no longer fulfill.

At this point, “whereas there has been a long history in the United States of extensive public reliance on private nonprofit groups to conduct publicly agreed-on purposes, this new era is typified by private philanthropy setting the agenda and providing alternatives, determining both the purposes and who carries them out to an unprecedented extent.”

Horvath and Powell use the example of privately-funded science to explore the benefits and pitfalls of increased private financing of public goods and outline a new form of philanthropy reflecting the “audit” function, in which philanthropy holds official bodies responsible. They conclude that contributory philanthropy may still be the best model for philanthropy, cautioning against embracing the disruptive model without seriously considering the position of those affected by philanthropic interventions.

Abolish the Charitable Deduction

“The Case for Doing Away with the Charitable Deduction” – by Robert McClelland
philanthropy.com/article/the-case-for-doing-away-with-the-charitable-deduction

Deductions from taxes owed have been the primary means of subsidizing U.S. charitable giving for decades. This op-ed makes the case for replacing that arrangement with matching grants, which have been found in various studies to hold greater appeal for potential donors. Under a matching grant system, nonprofits would report donations to the government on their Form 990’s and receive matching funds, providing the same incentive to all income levels of donors.

The issue has immediate relevance because the standardized deduction is slated to drop when the deductibility portions of the Tax Cuts and Jobs Act (TCJA) expire at the end of 2025. Lower standardized deductions could have the effect of increasing incentives for giving by those lower on the income spectrum, while lowering giving for upper-income taxpayers. But given that, at present, the top 10 percent of taxpayers overwhelmingly use the system of deductions far more than everyone else, many might welcome the modest equalizing effect of changing to a matching grant system.

McClelland cites three reasons why the current system does not work for broad public participation:

• First, charitable deductions are available only to higher-income households that itemize their taxes – approximately 10% of households.
• Second, higher-income donors receive greater benefits, dollar-for-dollar, than taxpayers lower on the income scale. Indeed, a high-income donor may receive a 37-cents per dollar reduction in taxes, whereas for a donor with modest income that benefit can be just 10%.
• Third, high-income donors benefit from greater deductions in connection with unrealized capital gains.

The charitable deduction offers incentives to those who already have significant tax advantages over others while providing no incentive to the overwhelming majority of taxpayers who are non-itemizers. The TCJA exacerbated this imbalance, resulting in a $20 billion loss to nonprofits in 2018.

The matching grant system might lower overall donations. In particular, the very wealthy use the charitable deduction to fund billions in donations. Yet the giving patterns the new system would foster would be more likely to reflect the wishes and preferences of a greater cross-section of the population. Moreover, while it could pose administrative burdens – especially on small nonprofits, and create friction in regard to religious donations, McClelland concludes that the matching grant system would be well worth the effort.

DAFs and Anonymity

“Why Your DAF Donor May not Be Anonymous After All” – by Drew Lindsay
philanthropy.com/article/why-your-daf-donor-may-not-be-anonymous-after-all#:~:text=DAF%20sponsors%20send%20gifts%20via,t%20forward%20to%20the%20organization

DAF account holders often opt to remain anonymous to the public. They may not realize when they express this preference to their DAF sponsors that they are likely to also be anonymous to the grantee as well. This article describes the deficits in the systems DAF account holders that perhaps unintentionally result in donors remaining remote from the organizational recipients of DAF funds. Typically donors can choose whether their names and contact information will be provided to grantee nonprofits; typically the default is anonymity.

Many attribute the range of problems associated with DAF donor-grantee communication to the systems’ technology and digital interfaces. In some cases, the donor’s identity does appear in the documentation but lies in unexpected places or is otherwise difficult to find. Ultimately, miscommunication and lack of clarity in information provided to both sides appear to be responsible for much of the confusion. Indeed, the DAF Research Collaborative has found that fewer than five percent of DAF grants are made with the intent of hiding the donor’s name.

A Case for Transparency

“How Transparent Philanthropy Can Liberate Billions of Dollars — and Do More Good” – By Kevin McPherson, Pooja Wagh, Peter B. Kaufman and Jeff Ubois
philanthropy.com/article/how-transparent-philanthropy-can-liberate-billions-of-dollars-and-do-more-good

In recent years, areas as varied as science, education and software have adopted policies calling for greater transparency and open sharing of information. Now, there is a nascent open-philanthropy movement. It aims to make charitable giving more “transparent, accessible, and equitable for grantees. Its goal: to increase the impact of philanthropic giving and liberate the billions of dollars of philanthropic capital sitting in donor-advised funds and untapped endowments.” Organizations such as the Philanthropy Data Commons, the GivingTuesday Data Commons, 360Giving, Data.org, and Lever for Change’s Bold Solutions Network are steps in this direction.

Technology can assist and expand these efforts substantially. Computational tools and artificial intelligence can streamline the application and award processes and make philanthropy more effective. Moreover, technology can be employed to assist foundations in evaluating proposals; helping nonprofits find and apply for grants; identifying bias in existing funding practices; and ensuring greater resources are matched with the most promising projects.

In addition to technical measures, the authors counsel donors to focus on reaching more potential grantees, improving the grant application process and identifying areas of greatest need. In order to bring about more equitable and effective grant making, they urge donors to be open to innovation and willing to experiment with solutions to problems that have plagued the sector for years.

Impact of the Tax Cuts and Job Act on Giving

“Donors Likely Giving $16 Billion Less Each Year After Tax Law Change, Report Finds” – by Rasheeda Childress
https://www.philanthropy.com/article/donors-likely-giving-16-billion-less-each-year-after-tax-law-change-report-finds

In 2018, the year the Tax Cuts and Jobs Act (TCJA) took effect, charitable giving was reduced by approximately $20 billion.

The main cause was the TCJA nearly doubling the standard income tax deduction, resulting in far fewer taxpayers who itemize. Accordingly, they lost access to the charitable deduction. In economics, when people cease doing something based on its price going up is called elasticity. That is precisely what has happened here: the cost of giving to charity has increased significantly for the enormous cohort of taxpayers with incomes between $30,000 and $150,000.

The article covers the findings from a new working paper by the National Bureau of Economic Research, a think tank in Cambridge, Mass. Although the research is limited to 2018, it projects that $16 billion of this charitable giving loss was permanent and did not return in subsequent years. The change was no surprise to observers who had warned about this possibility when the TCJA was being considered. The report was based on data from the Philanthropy Panel Study. Its data, collected since 2001, follows the same families over time to see changes. The nature of the panel allowed researchers to compare subjects’ giving and tax filing status before and after the TCJA went into effect.

It remains to be seen how Congress will handle charitable deductions when the TCJA expires at the end of 2025. Nonprofits and others are encouraging passage of either a universal charitable deduction or other means of expanding exemptions and increasing incentives for charitable giving in order to reverse the sorry trend the article outlines.

Donor Revolt

“These Donors Are Revolting Against the “Charity Lobby” to Push Sweeping Philanthropic Reform” – by Dawn Wolf
insidephilanthropy.com/home/2024-4-9-these-donors-are-revolting-against-the-charity-lobby-for-real-philanthropic-reform

Since passage of the Tax Reform Act of 1969, which largely established US philanthropy’s current institutions and practices, it has been difficult to bring about philanthropic reforms — even obviously needed ones. Wolfe concludes that this is because philanthropic institutions and stakeholders have resisted reform proposals, stubbornly adhering to the status quo. In recent years, however, a group of reform-minded donors have united in support of an effort called the “Donor Revolt for Charity Reform.” At the heart of this effort is a campaign to require delivering all funds receiving charitable tax exemptions to working charities. In addition to, and bolstering this premise, the group’s multipronged strategy includes passing legislation that mandates greater payouts for private foundations (from five to 7% and 10% for those with assets exceeding $50 million) and taking measures to address the philanthropic sector’s increasing top-heaviness. In addition, foundation payout calculations would exclude transfers to DAFs and payments to heirs. Significantly, the list of reforms also calls for requiring a five-year payout for all DAFs and limiting the estate tax charitable deduction.

One of the Donor Revolt’s strengths is that many of its participants have been involved in previous reform efforts and are using that experience to inform their current approach. They have increasing support on Capitol Hill, where several Members from across the political spectrum have called for philanthropic reform. Moreover, the group is encouraged by research revealing that the public, when informed about specific problems involving the philanthropic sector, has been found to favor reform.