Pressure is growing to address a fundamental design flaw in our charity system. Wealthy donors get substantial tax breaks when they place funds into their private foundations, and even more in the case of their donor-advised funds (DAFs). But there is very little requirement that they move those funds to active charities, even in the face of a global pandemic.
Private foundations are sitting on top of over $1 trillion in wealth, with a mandate that they pay out a minimum of 5% of their assets on an annual basis. And an additional $120 billion is parked in donor-advised funds, with no mandated payout requirement ever.
Lawmakers are considering an “emergency charity stimulus” in order to unlock an additional $200 billion in charitable resources over the next three years. The temporary legislation would mandate that foundations double their payout from 5% to 10% and that DAFs have a 10% payout, as well.
As Inside Philanthropy has reported, foundations are digging deep right now and voluntarily increasing their payout. The Libra Foundation and the Wallace Global Fund have recently announced boosts in their payouts.
Over 700 foundations have signed a pledge to “act with fierce urgency” to support nonprofit partners and communities hit hardest by COVID-19. The community foundation sector has set up emergency response systems in all 50 states to channel donations to COVID-19 response efforts.
These are inspiring voluntary efforts, but it’s time to mandate an increased flow of resources.
If history is any guide, the majority of foundations will continue to treat 5% as a ceiling instead of a floor. And with a focus on perpetual existence, they will pull back their giving in 2021 and 2022, with disastrous results for the independent sector.
This is analogous to a massive food bank that, during a time of famine, only gives out 5% of its food stocks in order to save 95% for some future famine. Is it really in the interests of taxpayers, those of us who have subsidized the creation of these private charity funds, to encourage perpetual private institutions controlled by the wealthy?
“The time for polite requests is passed,” Scott Wallace, co-chair of the Wallace Global Fund, wrote in USA Today. “Only Congress has the power to force this massive injection of wealthy people’s money into jobs and nonprofit charitable organizations working in vital areas like health care, food banks, poverty alleviation, education, social justice, and economic development and job creation.”
As Wallace points out, an emergency charity stimulus has already been “paid for” by past tax deductions. “The wealthy donors who created these foundations and DAFs have already reaped vast taxpayer subsidies for their future generosity. But we are in the crisis of our lifetimes. Let’s speed up some of that generosity, right now.”
How big are those tax subsidies? According to research published in Tax Notes by Roger Colinvaux and Ray Madoff, for every $1 a wealthy individual in the top tax bracket donates to charity, the U.S. taxpayer chips in as much as 74 cents in lost tax revenue, depending on how much income, capital gains and estate tax revenue is reduced.
“We laud the foundations and donor-advised funds that are paying out substantially more than 10 percent,” Morris Pearl and I wrote in a column we co-authored for The Hill. Pearl is chair of the Patriotic Millionaires and former managing director of BlackRock, the largest investment fund in the world.
“We urge them to join this emergency effort to ensure that all charity funds get off the sidelines,” we wrote. The Patriotic Millionaires are joining with others to organize a sign-on letter of philanthropic leaders and donors in support of the emergency charity stimulus. “America’s taxpayers have effectively paid for these donations through deductions taken by donors. Now, we need these funds to be deployed to working charities.”
Chuck Collins directs the Charity Reform Initiative at the Institute for Policy Studies and is coauthor, with Helen Flannery, of the briefing paper “The Case for an Emergency Charity Stimulus.” He is coauthor of numerous reports on charity reform, including “Top Heavy Philanthropy and Its Risks to the Independent Sector and Warehousing Wealth: Donor-Advised Charity Funds Sequestering Trillions in the Face of Growing Inequality.“