Rethinking Taxation: The Case for Including Major Foundations in Endowment Tax Reforms

As pressure mounts in Congress to address the increasing Left-leaning influence of universities, legislators are eyeing an increase in the excise tax on their substantial endowments. Institutions like Harvard, boasting a $50 billion endowment, and Yale, with $40 billion, are prime targets for lawmakers seeking new revenue streams without raising tax rates. Arkansas Senator Tom Cotton has proposed imposing a one-time tax on these large endowments with the aim of generating $16 billion.

However, there exists another subset of financial assets that warrants attention from Congress: the sprawling endowments of major private foundations. Many of these foundations maintain a strong progressive bias and lack accountability when compared to universities. Foundations such as Ford, Bloomberg, and MacArthur operate independently from tuition fees and government grants, rendering them less vulnerable to market demands or political influence. Their governance structures allow board members to choose their successors, contributing to a cycle of self-perpetuation.

A Closer Look at Major Foundations

Among the prominent foundations are the Ford Foundation, which holds $16 billion with a focus on income inequality, and the Rockefeller Foundation, boasting $6 billion, which works to reduce fossil fuel usage despite its origins in that very industry. Other significant players include the Hewlett Foundation ($14 billion), which prioritizes climate change, the Kellogg Foundation ($14 billion), which seeks to promote racial healing, and George Soros’ Open Society Foundations, valued at $23 billion, known for supporting initiatives like cannabis legalization and criminal justice reforms.

These foundations have drawn criticism from figures such as JD Vance, who labels them as “cancers on American society that masquerade as charities.” He contends that their endowments represent “ill-gotten wealth” that finances radical leftist ideologies. This perception underscores the growing concerns about the unchecked power and influence wielded by these entities.

Rapid Growth of Foundation Assets

The financial clout of these foundations cannot be overlooked. Data from FoundationMark indicates that U.S. foundation assets surged nearly $200 billion in 2023, reaching an unprecedented total of over $1.5 trillion. This remarkable increase in wealth primarily results from favorable investment conditions alongside significant contributions from wealthy donors.

Since 2018, the value of foundation assets has approximately doubled, influenced by a robust investment climate and a steady influx of donations. Wealthy benefactors enjoy tax advantages through deductions of up to 30 percent of their income, resulting in $103 billion in charitable contributions in 2023. Meanwhile, foundations pay a minimal excise tax of only 1.39 percent on their capital gains, raising questions about their financial responsibility.

The Call for Reform

The objective is not to penalize foundations based on their philanthropic inclinations or consider extreme measures like asset seizure, which JD Vance suggested. That approach could be more detrimental than beneficial. It is important to recognize that there are right-leaning foundations, although they are fewer in number and generally less wealthy. Instead, lawmakers should focus on legislating to decrease the size of these foundations, gradually pushing them toward a model of “sunsetting” where they operate within defined timeframes rather than remaining indefinitely entrenched.

Prominent philanthropic figures, such as Bill Gates, have already signaled their intention to move toward this model, with his foundation being the largest in the nation at $75 billion. Historical precedents exist, as demonstrated by Henry Ford II’s resignation from his eponymous foundation in 1976. Ford expressed concern over how the foundation’s grantmaking had strayed from its original mission, driven by what he termed an “anti-capitalist drift.”

Enhancing Incentives for Charitable Giving

Raising taxes on major foundations would provide Congress with the means to amend the tax code. Such changes could restore incentives for individual taxpayers to engage in charitable giving. Currently, over 90 percent of taxpayers utilize the standard deduction, preventing them from benefitting from deductions associated with charitable donations. This shift occurred post the 2017 Tax Cuts and Jobs Act, leading to a significant decline in itemized deductions from 30 percent to just 7.2 percent of taxpayers.

It is vital to ensure that charitable giving does not become an exclusive privilege of the affluent and robust foundations. Leveraging an endowment tax applicable to universities and large foundations could fund an “above the line” deduction for charitable giving available to all taxpayers. This concept is not without precedent, as the Democrats previously included a $300 deduction in the CARES Act during the COVID-19 pandemic. This initiative resulted in $4.8 billion in tax reductions and encouraged essential charitable contributions at a crucial moment.

Support Preferences Among Individual Donors

It is noteworthy that, despite the leftward tilt of major foundations, individual taxpayers often prioritize support for different types of organizations, particularly religious institutions. According to the Giving USA report, individual donations to religious causes totaled $145 billion, overshadowing the mere $22 billion directed to environmental initiatives.

As Congress weighs the impact of extending the 2017 tax act, significant reforms impacting major foundations must remain on the table. A balanced and equitable approach to taxation stands as an essential step toward ensuring a more just philanthropic landscape.