Congress’ latest tax proposal, buried within the sprawling $3.7 trillion House Ways and Means plan, includes a little-discussed but highly consequential provision: a dramatic increase in the excise tax rate on net investment income earned by private foundations. Though seemingly a technical tweak, this provision (Section 112022) threatens to strip nearly $16 billion in charitable funding from communities over the next decade while doing virtually nothing to address America’s fiscal woes.
The plan abandons the long-standing flat excise tax of 1.39% on foundation investment income and replaces it with a punitive tiered system. Foundations with less than $50 million in assets will retain the current 1.39% rate. But the moment a foundation crosses that threshold, the generosity of their donors is punished:
- $50 million to $250 million: 2.78%
- $250 million to $5 billion: 5%
- Over $5 billion: 10%
This aggressive new structure targets nearly 2,900 private foundations, reducing their capacity to generate investment returns and distribute charitable grants. To put it plainly, every dollar a foundation pays in taxes is a dollar not going to a soup kitchen, food bank, medical clinic or emergency shelter. At a time when social needs are rising, Washington is proposing to divert philanthropic resources away from local communities and into the federal bureaucracy.
The scope of the damage is staggering. Private foundations collectively distribute more than $100 billion annually to charitable causes. This new tax is projected to extract $16 billion from those funds over 10 years, dollars that would otherwise support education, the arts, religious missions, medical research and local civic efforts.
Consider a foundation with a $5 billion endowment, earning a 7% return annually and distributing 6% of its assets each year:
| Excise Tax Rate | Investment Income | Excise Tax Paid | Gross Distribution (6%) | Qualifying Distribution | Shortfall from 5% Minimum | Required Gross Distribution (to net 5%) |
|---|---|---|---|---|---|---|
| 1.39% | $350,000,000 | $4,865,300 | $300,000,000 | $295,135,000 | $0 | $254,865,000 |
| 10.00% | $350,000,000 | $35,000,000 | $300,000,000 | $265,000,000 | $10,000,000 | $285,000,000 |
At the current 1.39% rate, the foundation’s 6% payout comfortably exceeds the required 5% minimum after accounting for the excise tax. But if the tax were raised to 10%, that same 6% payout would barely meet the minimum, leaving no margin for reinvestment or unexpected expenses. The result would be a $30 million drop, or nearly 10% decline in charitable impact. If the foundation wanted to maintain its compliance margin or sustain real charitable impact, it would need to increase its total distributions, placing greater strain on the endowment and potentially eroding future giving capacity.
In effect, a 10% excise tax would function like a stealth increase in the minimum payout rate in the short run, undermining the long-term sustainability of many foundations. In the long run, the asset size of foundations will shrink as more investment income is going to the government, and the number of dollars paid out to charity to hit the 5% payout requirement will be less than it would be without this tax hike. This means the tax will shrink the resources going into communities over time.
For policymakers serious about promoting philanthropy, such a tax hike would be a step in the wrong direction.
Advocates for the tax say wealthy foundations can afford to pay more. But this ignores two key facts. First, private foundations are already bound by law to spend at least 5% of their assets annually on charitable activities. And in practice, most give more: median payout rates consistently exceed 5%, and averages often surpass 7%. These institutions are already voluntarily doing far more than the legal minimum.
Second, the added tax burden doesn’t fall on idle wealth, it falls on investment income, which is precisely what fuels long-term, sustainable giving. Compounding returns from endowments allows foundations to plan for the future, support multiyear initiatives and fund capital-intensive work like medical research and charitable works programs. Taxing this income at progressively higher rates undermines those goals.
What’s the fiscal upside to this heavy-handed measure? Practically nothing. Over the next decade, the federal government is projected to run deficits totaling $22 trillion, not counting this tax bill. Add in the $3.7 trillion tax package itself, and we’re staring down almost $26 trillion in red ink. The proposed foundation excise tax hike would close just 0.06% of that shortfall.
Even if the tax miraculously raised 100 times more revenue than projected, it would still be a rounding error in the federal budget. The notion that penalizing private charitable foundations will meaningfully improve fiscal sustainability is laughable. Worse, it deflects attention from the true drivers of federal debt: unsustainable entitlement programs, runaway discretionary spending and a chronically undisciplined Congress.
Perhaps most galling is the breach of donor intent this policy represents. Private foundations are not public funds; they are vehicles created by individuals and families to express their philanthropic vision. As Joanne Florino of Philanthropy Roundtable notes, this tax would override the principles and goals of countless donors, from the progressive arts focus of the Mellon Foundation and the regional mission of the Duke Endowment to the conservative values upheld by the Lynde and Harry Bradley Foundation.
While some conservatives may relish the thought of curbing left-leaning mega-foundations, they should tread carefully. This policy will not discriminate. It will hurt conservative and faith-based foundations just as severely. Groups like the Lilly Endowment and Daniels Fund, mainstays of faith-based and free market philanthropy, will also be ensnared. In seeking to punish ideological opponents, conservatives risk undermining their own allies in civil society.
Philanthropy, at its best, is a decentralized, responsive and innovative complement to government. Unlike federal agencies, private foundations are nimble, mission-driven and directly accountable to donors and boards. They fill gaps that government cannot or will not address. They are, in short, exactly the sort of institution a vibrant, pluralistic society should encourage.
Instead, this proposal would penalize them.
This tax on generosity is not just bad economics, its bad governance, bad policy and bad politics. It weakens civil society, siphons money from charitable work, violates donor intent and offers nothing in return except more bloated federal spending. Lawmakers should abandon this ill-conceived plan before it does irreversible harm to America’s philanthropic landscape.
