Foundation Payout Mandate Would Raise $8.7 Billion in Revenue Over 3 Years

An “emergency charity stimulus” should be included in the next budget reconciliation bill considered by Congress.

Implementing a three-year emergency charity stimulus (ECS) — by mandating an increased private foundation payout and requiring donor-advised funds (DAFs) to have a payout — would incentivize over $200 billion dollars to flow to charities hard hit by the pandemic.

It would also have both direct and indirect revenue fiscal benefits to the U.S. Treasury.  In addition to indirect fiscal benefits resulting from increased employment in the nonprofit sector, the ECS would generate meaningful revenue.

A new analysis, “Fiscal and Budgetary Impact of Emergency Charity Stimulus,” by the Charity Reform Initiative at the Institute for Policy Studies found that the proposal would raise $8.7 billion in direct revenue over three years.  The revenue would come from excise taxes on private foundations and DAFs that fail to meet the increased payout mandate.

The proposal would also generate billions in indirect revenue by saving tens of thousands of jobs in the nonprofit sector, reducing unemployment insurance, and increasing income tax revenues.  The IPS analysis only looked at the direct excise tax revenue.

The proposed legislation would mandate a boost in the annual payout requirement for private foundations from the current 5 percent to 10 percent.  An estimated $1.2 trillion is warehoused in private foundations, while over $120 billion is in donor-advised funds. With a few notable exceptions, most foundations have been slow to act to address the urgency of the crisis.

Donors to private foundations and DAFs have already taken charitable deductions, worth as much as 74 cents on the dollar for wealthy donors.

The temporary rule change would increase the flow of funds to the nonprofit charity sector, which has been hammered by the pandemic and layoffs, and would come at no additional expense to taxpayers.  Prior to the pandemic the nonprofit sector employed over 12.3 million people, an estimated 10 percent of the U.S. workforce. According to a recent Johns Hopkins study, as of February 2021 the nonprofit sector is still down more than 926,000 jobs from February  2020. Hardest hit are local nonprofits that provide direct community services, organizations providing medical services for children and the elderly, and especially arts, cultural, and recreational organizations. The study estimated that it will take nearly two years for nonprofit employment to return to pre-Covid levels.

The IPS policy brief estimates that the ECS proposal would bring in over $8.7 billion in revenue over three years in increased excise taxes from private foundations and DAFS that fail to meet the newly mandated 10 percent distribution rate:  $8.3 billion from foundations, plus $394 billion from DAFs. In 2021 alone, the revenue would be $2.7 billion from private foundations and $118 million from donor advised funds.  These amounts would increase in years two and three. This is a conservative estimate, according to the authors of the brief.

Read more at Chuck Collins and Helen Flannery, “Fiscal and Budgetary Impact of Emergency Charity Stimulus,” Institute for Policy Studies, March 2021.