Steve Miller’s December 12 RealClearInvestigations article, “How Tax-Exempt Nonprofits Skirt U.S. Law to Turn Out the Democrat Base in Elections,” is both jarring and informative and helps frame many important questions facing philanthropy, conservatism, and conservative philanthropy.
Miller describes the general size and scope of activities being conducted a progressive nonprofit infrastructure that has “taken on an outsized part of the Democratic Party’s election strategy” and, specifically, how they “work around legal restrictions on nonprofits that accept tax-deductible donations by selectively engaging in nonpartisan efforts including boosting voter education and participation.”
The infrastructure also includes nonprofit grantmaking institutions, which are also tax-advantaged and also evade restrictions on partisan political activity.
As Institute for Free Speech chair Bradley Smith tells Miller, that progressive grant-recipient groups outnumber, outraise, and outspend conservative entities. Contemporary, politicized Big Philanthropy — as my Giving Review co-editor Bill Schambra has noted — is “an oppressively arid, progressive monoculture” and “[c]onservatives need to face this truth.”
On the day Miller’s article appeared, the Subcommittee on Oversight of the House Ways and Means Committee held a hearing on the how the growth of the tax-exempt sector is changing the U.S. political landscape. During the generally non-contentious proceeding, members and witnesses floated or endorsed several potential discrete changes to law and regulations on tax-exemption, foreign funding of exempt nonprofits, and the degree to which those groups and their also-exempt funders can engage in voter registration.
The proposed reforms included, among others, the following: (1) banning foreign contributions to tax-exempt nonprofits; (2) curbing contributions to political super PACs from social-welfare nonprofits that accept foreign contributions; (3) barring private foundations and public charities from funding and engaging in voter-registration projects; (4) banning private contributions to state- and local-government election administration; and (5) redesigning Internal Revenue Service Forms 990, including to request and then provide to the public more information about “fiscally sponsored” projects, and 990-PF.
Two days after Miller’s article and the oversight subcommittee hearing—at the other end of the U.S. Capitol, Sen. J. D. Vance, Republican of Ohio, introduced the College Endowment Accountability Act, which would increase the excise tax on endowment net investment income from 1.4 percent to 35% for secular, private, nonprofit colleges and universities with at least $10 billion in assets under management.
Big Philanthropy is big mostly because of its similarly large nonprofit endowments. Vance’s bold bill would be a decidedly non-incremental policy step, and could serve as an opening bargaining position for future discussions about all such endowments’ tax treatment.
Rates and Rises
The current 1.4-percent tax rate on the endowments of colleges (whose student bodies are majority U.S. citizens, where more than 500 students are tuition-paying, and where total assets exceed $500,000 per student) was set by the Tax Cuts and Jobs Act of 2017.
“While it is a relatively small tax, this new law is a first step towards the exploration of taxing non-profit entities on the vast sums of wealth they hold in their endowments,” University of Kentucky law professor Jennifer Bird-Pollan wrote in a Pepperdine Law Review article about the tax and its wider implications.
“If we believe the rationale for imposing the excise tax stems from a distaste for excessive accumulation on the part of these wealthy universities, perhaps we should take the rationale even further,” she observed. “Why are we focused only on universities? … Seeing the 2017 tax bill’s university endowment excise tax as opening the door to imposing tax as an incentive tool to stop the excessive accumulation of wealth by non-profit entities lets us imagine what else we might see ….”
In fact, in the Further Consolidated Appropriations Act of 2020, Congress set the excise tax on the income of private-foundation endowments at a flat 1.39%. Prior to the simplifying change, the rate was 2% percent, but could decrease to one percent if a foundation increased its charitable grant distributions.
Rationales for Reform
If one believes there’s a good rationale for proposing an increase of the tax in the higher-education context, it seems the same rationale would apply to private foundations. Here’s how Vance’s explained his reasoning for a higher-ed endowment tax increase on the Senate floor: “How is it,” he asked, that universities, which “should be responsive to the public will, responsive to their donors and alumni, responsive to their students, how is it that they can go so far so fast without any pushback?”
The answer, he continued, “is university endowments, which have grown incredibly large on the backs of subsidies from the taxpayers, and they have made these universities completely independent of any political, financial, or other pressure ….”
In 2021, prior to formally declaring his Senate candidacy, Vance floated a reform idea that treated the tax status of all nonprofits, including foundations, the same. “[W]e should eliminate all special privileges that exist for our nonprofit and foundation class,” he told a Claremont Institute audience.
Why is it that if you’re spending all your money to teach literal racism to our children in their schools, why do we give you special tax breaks instead of taxing you more? …
The decision to give those foundations and those organizations special privileges is a decision made by public policy. It was made by man, and we can undo it.
Three months later, Vance then specifically applied this equivalence. “Any charitable organization with an endowment over $100 million must spend 20% of its endowment each year, or else it loses its 501c3 status and the preferential treatment of its income,” he proposed. Echoing his made-by-man-and-can-be-unmade thinking, Vance notes, “The Ford Foundation and the Harvard endowment don't have a constitutional right to tax advantages that are unavailable to the vast majority of American citizens.”
Questions
Along with the similar work of others — including at the Capital Research Center, where I’m a senior fellow — Miller’s article, the Ways and Means oversight-subcommittee hearing, and Vance’s bill raise even more fundamental questions. These are especially relevant to conservatism, and conservative philanthropy.
Of philanthropy: What’s it for? If it’s for charity, but it being used for partisan electoral politics, what’s to be done?
Of conservatism: Where on the spectrum of proposed policy reforms, between the carefully tailored oversight subcommittee options and Vance more-existential “threat” to large nonprofit endowments, should principle nudge us? Slight alterations or frontal assaults, or a mixture of both?
Finally, regarding conservative philanthropy: Can it face the truth of how radically progressive, policy-oriented, and partisan most Big Philanthropy has become? Are conservatives bound by principle to defend such a regime? Is the traditional understanding of charity worth somehow trying to preserve despite how the system has been abused by partisan politicization?
Or should the conservative side of philanthropy aggressively “fight fire with fire” and engage in the same kind of politicization itself, if only to try neutralizing the other effort? And if the other side’s fire so often includes successfully influencing the formulation, passage, and implementation of government policy — shouldn’t its fire too?
Michael E. Hartmann is a co-editor of The Giving Review and a senior fellow at the Capital Research Center.
