Senate Republicans have removed a House-passed tax increase on private foundations from President Trump’s One Big Beautiful Bill, but philanthropic organizations are still worried it could end up in the final package.

Foundations and allied groups warned the tax increase would undermine charitable giving and the countless programs and services those donations fund.

“This enormous transfer of private resources to fund big government spending runs counter to conservative principles and the Trump administration’s efforts to reduce the size and scope of the federal bureaucracy,” the Philanthropy Roundtable and other free-market and conservative organizations wrote in a letter to Senate leaders this month.

“Instead of targeting the resources of private foundations, Congress should view them as the perfect partner to fill the gaps as policymakers roll back bloated and ineffective government programs,” they said.

The Senate got the message. The text of the Finance Committee portion of the budget reconciliation package released Monday did not include the tax increase on private foundations that was in the version the House passed last month.

“I’m in favor of nonprofits and being able to function as a nonprofit, because we need strong nonprofits,” Senate Finance Committee member James Lankford, Oklahoma Republican, told The Washington Times.

Nonprofits are exempt from most federal taxes, but under current law, private foundations have to pay an excise tax on their net investment income.

Foundations receive donations to endowment funds, which are invested. The returns are used for giving, while the principal is typically retained for continued investments to expand the fund for future use.

The current excise tax rate on net investment income is 1.39% for all private foundations.

The House-passed provision would impose a tiered rate increase for foundations with $50 million or more in assets, starting at 2.78%. The rate jumps to 5% for foundations with more than $250 million in assets and caps off at 10% for foundations with more than $5 billion in assets.

The Joint Committee on Taxation projects the foundation tax increase would raise nearly $16 billion over the next decade.

The Philanthropy Roundtable estimates it would affect 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,” the group said.

An action alert from the Council on Foundations, a nonprofit that supports more than 900 philanthropies, warned the proposal would raise taxes on foundations by as much as 619% and “threatens the billions of dollars they provide to community nonprofits every year.” 

“It also means less flexibility for showing up in response to crises, as private philanthropy always does,” the council said, noting its concern the provision could still be included in the final package despite being left out of the Senate version of the bill.

One foundation executive, who requested anonymity, told The Times that if the tax increase were enacted, her organization, which has given away more than $100 million in some years, would be paying more in taxes than it does for its entire operating budget.

“It seems counter to the mission of the foundation and the interests of the federal government to have us pay more for something that does not relate directly to that mission,” she said.

Tax writers on the House Ways and Means Committee said the tax increase was designed not just as a revenue raiser to offset other tax cuts in the bill, but also to encourage foundations to spend more of their money.

Rep. Kevin Hern, Oklahoma Republican, told The Times there was no ulterior motive besides ensuring that foundations are spending their charitable gifts for their intended purpose, “the greater good.”

“And if you’re going to hold onto the money, why shouldn’t you be taxed like other companies that make money?” he said. “I’m sure there are people that don’t like it, but our deal is: Deploy the money.”

Rep. David Schweikert, Arizona Republican, another tax writer, similarly described that as the goal.

“If it’s a charitable foundation, maybe the money should be being spent on charitable [causes] instead of the foundation acting like a hedge fund,” he told The Times. “That’s one of our real issues right now. … They’re participating in the markets like they’re a hedge fund since they don’t have the tax exposure.”

Private foundations are required by law to spend at least 5% of their assets on charitable activities each year.

“And in practice, most give more: Median payout rates consistently exceed 5%, and averages often surpass 7%,” the Philanthropy Roundtable said.

It provided an example of a foundation with a $5 billion endowment that earns a 7% return, equivalent to $350 million in investment income.

That foundation would pay $4.9 million in taxes at the current 1.39% rate but under the House proposal would be taxed at 10% and owe $35 million.

If that foundation were distributing 6% of its assets each year, or $300 million, it “comfortably exceeds” the required 5% minimum after accounting for the excise tax at the current 1.39% rate, the Philanthropy Roundtable said. It would barely meet it at the 10% tax rate, “leaving no margin for reinvestment or unexpected expenses.”

“The result would be a $30 million drop, or nearly 10% decline in charitable impact,” the group said. “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.”

Foundations are not hoarding money, as the House tax writers suggested, and the tax increase could have the opposite effect of what they are intending, the anonymous executive said.

“Because taxes would be considered one of your operating expenses that fulfills that [5%] spending requirement, in fact you would be potentially taking it directly from the money that would otherwise be going out,” she said.

The executive said the government should want to protect private dollars that can be spent on economic development and other causes that can serve as a “seed experimentation” for future public investments.

“You need these early-stage dollars to test the ideas so that when you put public tax dollars in place, you have confidence that they are going to be used effectively,” she said.

• Lindsey McPherson can be reached at lmcpherson@washingtontimes.com.