Biden Budget Targets Charitable Givers

Last week, the Biden administration released its proposed budget for fiscal year 2024. While the budget is essentially just a wish list that is unlikely to be introduced as legislation or enacted by Congress in its entirety, it sends a clear message about the president’s priorities.

Among various tax and spending increases, the plan calls for changes that target America’s givers and the charities they support. Two tax proposals stand out as the most concerning. Both were features of a bill introduced in the last Congress that we have covered extensively: the so-called Accelerating Charitable Efforts Act (ACE Act). It is telling that the supporters of this dangerous legislation failed to gain momentum for their bill and failed to persuade the administration to include even more provisions in its budget. Below, we discuss the two pieces that did make it into the wish list.

Limits on Private Foundation Use of DAFs

Just as it did in last year’s budget, the Biden administration calls for Congress to “limit use of donor-advised funds to avoid a private foundation payout requirement.” This isn’t a new idea and may even be the subject of future U.S. Treasury regulations. However, it is misguided.

Here’s the background: Private foundations are required to distribute to charities 5% of their assets each year. The argument by proponents of the ACE Act is that when a foundation donates money into a donor-advised fund (DAF), but does not immediately pay it out to a charity, the foundation is violating the spirit of the payout requirement. The proposal is to disallow DAF contributions from counting toward a foundation’s payout, unless it is fully distributed out of the DAF by the end of the following year.

What this argument misses are all the valid, legitimate, pro-charity reasons why a foundation may choose to give through a DAF. (We go through many of these here.) They include a foundation using a DAF to pool funds with other givers for a specific mission, or a foundation giving through a DAF to issue a one-time, off-mission grant, such as COVID-19 relief, without opening the door for further solicitations, or a foundation giving through a DAF to protect their privacy when granting to a controversial cause.

The Roundtable recently featured a video with Tom Riley, president of the Connelly Foundation, on the value of allowing foundations to give through DAFs. In his words:

“If Congress restricts the ability for foundations to give to donor-advised funds or to have it not count toward their foundation payout requirements, that’s going to shrink foundation giving. It’s going to make foundation giving more difficult, less creative and less effective. … All Americans deserve the ability to give both freely and strategically and to be able to respond to crises quickly or give long-term … without the threat of overregulation. DAFs make it possible for donors of every income to give to causes or communities that matter most to them.”

We know DAFs are powerful giving vehicles that support charities and those in need across the country. We know that DAFs effectively self-regulate to ensure funds flow out at robust rates to the charities hard at work in our communities. We also know that, while it is rare for foundations to give through DAFs, there are good reasons some may choose to do so.

Discriminatory Rules for Family Foundations

New this year in the FY 2024 budget is a proposal to “exclude payments to disqualified persons from counting toward private foundation payout requirement.” In other words, while nonfamily foundations would continue to be allowed to count their employee expenses toward their annual payout requirement, family foundations with working family members would not.

There are already strong laws in place to prevent self-dealing when it comes to private foundations. What this proposal suggests is unfounded discrimination against family foundations without any evidence of abuse of charitable funds.

In fact, a Roundtable policy brief and subsequent study found that family foundations tend to have lower administrative expense ratios than those run by nonfamily staff. An earlier Urban Institute study noted:

“The lower median expense–to–qualifying distribution ratios for family foundations compared to nonfamily foundations suggests that family members hold staff-related costs down by providing no- or low-cost labor for administering grants and other programs. Some family members also contribute office space and administrative services, such as legal and accounting, thereby lowering expenses.”

Why then would the administration or supporters of the ACE Act argue that family foundations should be treated differently under law?

Other Concerning Provisions

Throughout the budget, President Biden takes issue with “wealth.” He calls for a new tax on assets, even illiquid assets, changes to how capital gains and carried interest are taxed and new reporting requirements for trusts and other rule modifications for trusts that may impact donors who give through Charitable Lead Annuity Trusts.

While the details in the administration’s “Greenbook” that accompanies the budget suggest that charitable giving may be exempt from the wealth tax proposal and changes to capital gains tax calculations, the budget is just a wish list. If Congress considers actual legislation based on these proposals, such exemptions may not be incorporated.

We should note that even if charitable resources were exempt from new taxes, the unintended consequences of imposing such a tax would still harm charities. A 2020 analysis of similar proposals found that a wealth tax would shrink the economy and erode the giving power of Americans. These changes would result in fewer resources for charities and the communities they serve.

In the wake of the Biden budget proposal, the Roundtable will continue educating members of Congress on the unintended consequences of the anti-charity proposals in Biden’s budget. Our country is facing tough economic challenges and the last thing we need is to handcuff America’s givers and restrict the ability for charities to receive support.