The Folly of the Trump Tax Bill's Hit on Foundations

A tale of donor advised funds and the law of unintended consequences

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The Trump tax bill, narrowly passed last month by the House of Representatives, is a breathtaking hodge-podge. In one fell swoop it embodies the final surrender of the House Freedom Caucus, the last holdouts for constraining the federal budget deficit; renews the 2017 Trump tax cuts for the rich; revives the federal subsidy of high-tax state governments; and fulfills Trump campaign promises on tax cuts for those receiving Social Security and tip income while mean spiritedly punishing millions on Medicaid and food stamps. It also threatens to revolutionize the world of private foundations and those, like many newsrooms, that have come to depend on them—and not in a good way.

This week I want to focus on the big change for private foundations, the almost-certain unintended consequences if these provisions survive Senate consideration, and what they might mean for the news business.

The change in the bill sounds simple. It increases the previously-minimal tax on investment income earned by foundations, and does so on a graduated basis. Those with less than $50 million in assets see no change, but those with more see the tax rate on such income anywhere from double to increase by nearly eight times in the case of the 25 foundations with more than $5 billion in assets. The change is officially projected to yield $16 billion in additional tax revenue over 10 years. (In case that seems like a lot, it’s one-fiftieth of one percent of federal spending.)

A simple idea— and its consequences

But as anyone who has ever followed tax law knows, changes in the Internal Revenue Code almost always lead to new forms of legal tax avoidance. In this case, the change is entirely predictable. It involves what are known as donor advised funds, or DAFs. DAFs have been available for years, and many individuals employ them. They allow you to put money aside to make charitable contributions following your instructions. You get to deduct the contribution to the DAF in the current year and give the money away whenever you want, including many years later. There is no provision on how much the DAF must give away in any particular year, only that it must all be given away eventually, and must go to tax-exempt entities.

Private foundations, in contrast with DAFs, are governed by a regime that began with the landmark Tax Reform Act of 1969. Most importantly, they have to publicly file tax returns (known as 990s after the IRS form number), listing their grant recipients by amount, and must give away an average of five percent of their assets each year. DAFs have no such requirements—no transparency, no payout minimum.

So, what will happen if the House bill becomes law? Most large foundations will almost surely put most of their assets in DAFs before the law takes effect. Given that nearly all of the projected new tax revenue will come from these foundations, the vast bulk of the $16 billion will never materialize. More importantly, big foundations will no longer be under the same pressure to make gifts each year, and what they do with their money may no longer be publicly known.

This isn’t just my opinion, by the way, nor is it a secret. John Arnold, who with his wife Laura runs Arnold Ventures, one of the country’s larger philanthropies (and an occasional consulting client of mine), said as much on Twitter, and the Chronicle of Philanthropy cited his conclusion.

Ford, for example

To see why this is right, let’s take the Ford Foundation as an example. Ford’s 2023 990 reflects that it had just under $17 billion in its endowment. On that, it made about $825 million in net investment income. At current tax rates, the investment tax bill on that was, at least notionally, about $11.5 million. Under the new law, it would be $71 million more, presumably reducing Ford’s grantmaking by that amount, a cut of more than 11%.

Ford couldn’t move everything into a DAF—they still need money to pay expenses, including of having a staff and managing all that money, which costs them (staggeringly, in my view) about a quarter of a billion dollars a year. To cover that, they might want to leave perhaps just under $5 billion in the Foundation, and put the other $12 billion in a DAF. The tax savings could approach $60 million, restoring that much in grant-making. The “tax increase” intended by the bill would entirely disappear because DAFs don’t pay taxes at all on net investment income.

Maybe the Republicans in the House are okay with this, because they chalk up yet another performative attack on the liberal establishment. But the Treasury gets nothing, Ford grantees—likely including newsrooms—get a bit less, and we are all left to depend solely on the good grace of Ford’s trustees, rather than the law, for any assurance of either transparency or that Ford will keep up the pace of grant-making, especially in years the endowment shrinks due to market declines.

What now?

The big foundations are busy lobbying against this folly in the Senate, and I hope they will prevail. That could result in eliminating most or all of the tax increase, or perhaps in the extension of taxes to DAFs, but don’t count on the latter—there are a lot of rich people who wouldn’t like it.

If the bill is enacted in its current form, I hope newsrooms will muster the courage to step up their own transparency about their donors, and that foundations will publicly commit to voluntarily maintaining payouts at previously mandated levels. In some cases, foundation boards may prove reluctant to move as much as they might to DAFs, in which case grants, including to newsrooms, are likely to fall.

Will Rogers once said that “This country has come to feel the same when Congress is in session as when the baby gets hold of a hammer.” We are being reminded once again these days of what he meant.