US foundations are bracing for big cuts to their charity outlays as President Donald Trump’s proposed budget seeks to ratchet up taxes on investment returns for non-profit groups.
Eight private foundations told the Financial Times they may reduce their annual distributions by up to a fifth, as the budget imposes a new tax rate of up to 10 per cent, from 1.39 per cent, on net investment income. The tax increase is part of the “one big, beautiful bill” passed by Congress last month and being debated in the Senate.
The foundations support a range of causes from poverty alleviation to combating antisemitism. The tax overhaul comes as the Trump administration slashes federal spending on everything from education to healthcare to shrink the government.
This is threatening to weigh on the US philanthropy industry even as it is playing an increasingly vital role in filling the void left by the state’s retreat.
“Our response to the federal government taxing the money that we give away is to have less money to give away,” said Adam Falk, president of the $2.1bn Sloan Foundation in New York, known for supporting scientific research. “There is no other response that I can imagine.”
US private foundations rely mainly on investment income to fund their operations, and several executives said they lack options to offset the cost of the tax increase. Many of them have already piled into illiquid private equity and venture capital investments, which are facing shrinking distributions.
The US government has for decades kept taxes on private foundations low to support their missions. The first Trump administration followed this approach by simplifying the excise tax on foundations’ investment income to 1.39 per cent in 2020, replacing the previous two-tier structure of 1 or 2 per cent based on past spending.
The latest tax bill, however, is threatening the sector’s long-standing business model.
Under the new law, the federal government will levy a 10 per cent excise tax on private foundations with more than $5bn in assets, 5 per cent on those holding between $250mn and $5bn and 2.78 per cent on those with assets between $50mn and $250mn.
Public records show more than 2,500 private foundations with more than $860bn in total assets may be subject to higher tax. The Congress Joint Committee on Taxation expected it to generate $15.9bn over the next decade.
While the additional revenue would do little to offset the federal government’s multi-trillion-dollar deficit, it is enough to put a serious dent in foundations’ financial capacity.
The new excise tax, if passed, will account for 5 to 20 per cent of their annual spending, according to foundation executives.
Falk, of the Sloan Foundation, said the proposed 5 per cent excise tax would cost his organisation between $5mn and $10mn a year, compared with $90mn in grant-making.
“It’s quite an impact,” he said. “It would impact every single programme.”
The tax affects liberal and conservative groups alike.
“This is not a partisan issue,” said Elizabeth McGuigan, chief operating officer at Philanthropy Roundtable, an industry advocacy group. “This applies to a lot of very important conservative causes such as efforts to combat antisemitism, school choice movements and all sorts of faith-based movements.”
An administration representative said the tax bill is designed to alleviate wealth inequality.
“The one big, beautiful bill will deliver historic working-class tax relief, eliminate taxes on tips and overtime and implement pro-growth policies that will turbocharge America’s economic resurgence,” White House spokesman Kush Desai said.
Another issue compounding challenges for foundations has been their increased exposure to private investments in recent years at the expense of liquidity.
The strategy has reached its limits as many foundations, led by large ones, allocated aggressively to private equity and venture capital, both of which are grappling with an inability to sell private holdings, realise profits and return money to investors.
“Most foundations ended up with more private equity exposure than they wanted,” said Rich Nuzum, chief investment strategist at Mercer, a consultancy that works with foundations.
Jennifer Ford Reedy, president of the Bush Foundation, which focuses on several Midwestern states, said her organisation holds “a lot of illiquid assets,” and was struggling to generate returns elsewhere.
“We are already pressing so hard,” she said. “I don’t know if we have so much more room to go.”
Sam Gill, president of the Doris Duke Foundation, which funds medical research and performing arts, said: “If we take government out of certain services and we restrict the ability for foundations and non-profits to meet those needs, then we are creating new problems.”
Others are counting on industry lobbying to stop the tax from passing in the Senate. Jenn Holcomb, vice-president of government affairs and legal resources at the Council on Foundations, said the industry association met recently with senators from both parties, many of whom were “surprised that the excise tax was even in the bill”.
