Tax policy experts, including current and former Treasury officials, debated whether the Tax Code is the right instrument for regulating the nonprofit sector at an Urban-Brookings Tax Policy Center panel September 22.
The panelists largely agreed that charitable tax incentives create difficult trade-offs, but they were more divided over how, or whether, the government should respond.
Treasury data challenges donor assumptions
Stephanie Karol, a financial economist at the Treasury Department’s Office of Tax Analysis, presented work on Schedule B of Form 990 that challenges assumptions about who funds major charities. Giving USA attributes roughly 60% of U.S. charitable contributions to individuals, but her data on the largest donors differs sharply.
“Among the major donors, we’re finding that only about 6% of those gifts come directly from individuals,” she said. Roughly a third of large gifts instead come from foundations or donor-advised funds (DAFs), and about 15% from corporations. That pattern, she argued, should push policymakers to “think more deeply” about the rules governing intermediaries, such as excise taxes and foundation payout requirements, not just the individual deduction.
Adam Tucker, a PhD student at the University of Maryland who studies giving by high-income households, called reliance on those intermediaries “an interesting policy problem”: a donor claims a tax benefit today, but the charity that receives the money can be chosen years later. Private foundations face an annual payout requirement, while DAFs carry no federal minimum distribution.
He also argued that capital gains and basis reforms could themselves function as charitable-giving policy, though he said the unrealized gains embedded in gifts of appreciated assets are difficult to measure.
Former Treasury official flags ‘perverse incentives’
Elinor Ramey, a partner and chair of exempt organizations at Lowenstein Sandler LLP who previously wrote regulations at Treasury, argued that the Tax Code is poorly suited to policing a sector she divided into three groups: churches and social-service charities; fee-for-service organizations such as hospitals and schools; and endowment-based entities such as foundations.
She cited the 1.4% college endowment tax enacted in the Tax Cuts and Jobs Act, P.L. 115-97, which she said made sense in principle but proved difficult in practice. Implementing it forced Treasury to define terms such as “student” and “net investment income,” she said, and created “perverse incentives” for universities. The tax gives schools “a benefit from a tax perspective to give full ride scholarships” to reduce their count of tuition-paying students, she said, effectively basing admissions on tax policy. The time and money spent minimizing the tax, she added, “could be going to instruction.”
Ramey said the same mismatch affects nonprofit hospitals, governed by IRC § 501(r), which she described as largely a disclosure regime. “This is the IRS,” she said. “The IRS is not set up to determine whether lead abatement is charity care.”
Elena Patel, codirector of the Tax Policy Center and a former Treasury employee, presented research comparing nonprofit hospitals with for-profit “twins.” Tax-exempt hospitals provide a third more charity care, but both types spend only 1% to 2% of revenue on it, while tax-exempt hospitals hold six times as much cash. The exemption, she argued, “buys a modest amount of charity care” while trapping surplus in organizations that have no shareholders to watch how it is spent.
Congress is examining the question, Patel noted: the House Ways and Means Committee summoned the chief executives of four large nonprofit systems, and its chairman likened them to “hedge funds with hospital beds.”
How to measure the subsidy
The timing gap drew disagreement. Tucker said policymakers have “a lot of latitude” to encourage faster grantmaking, but Ramey cautioned that speeding up payouts could reduce future giving. She noted that “many foundations want to exist in perpetuity” and that donors value that legacy, adding that forcing current spending is not a goal everyone shares.
Asked why the government does not estimate nonprofit tax subsidies alongside other tax expenditures, panelists cited practical and conceptual hurdles. Patel said what lands on Treasury’s tax expenditure list involves discretion and difficult valuations, such as pricing property tax forgiveness.
Karol cautioned that a tax expenditure is “a very static measure” that cannot capture how a sector would respond to change. Removing the hospital exemption, she said, could change the number and distribution of hospitals and produce “a different allocation of charity care.” The proper counterfactual cost or benefit, she argued, “is not going to be found in the tax expenditure.”
In closing, Ramey questioned the approach itself, saying the sector uses “tax policy to address social issues” through tax-exempt organizations, “which I would argue is a really, really bad way to do things.”
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