A new day.
According to the age-old rhyme often used by mariners, “Red sky at night, sailors’ delight. Red sky at morning, sailors take warning.” It may well be red sky at morning for the tax-exempt sector, but since it’s the beginning of a new day, it should see that there’s also opportunity.
The strong election night for President-elect Donald Trump and Vice President J. D. Vance ushers in an administration with an unprecedented interest in substantively reforming the tax-exempt sector. No President or Vice President has ever been as engaged with and focused on reforming the charitable sector as Vance.
These reforms of the tax-exempt sector have the potential to unlock hundreds of billions of charitable dollars that are currently sitting in warehouses. These charitable dollars can now be put into the hands of working charities that are helping those most in need and striving to improve local communities. Further, the administration has the chance to make real changes in our colleges and universities—especially our top colleges—making them more open, affordable, and welcoming for all Americans regardless of income. This especially includes our men and women in uniform. In addition, much-needed adjustments to tax-exempt hospitals can translate into dramatically improved medical treatment for those most in need and help end the grinding cost of high medical bills for working families.
The new day offers great hope for the tax-exempt sector—and more importantly, for Americans who are most in need of support from our nation’s charities.
In this context, there will be marked pressure on Congress’ tax-writing committees to scrub hard all the tax provisions—including those regarding tax-exempts—for additional revenues to offset certain new tax policies. The truth is, eliminating tax on tips isn’t going to pay for itself. Finally, the creation of the Department of Government Efficiency (DOGE) brings another entity to the party that could also look hard at the tax-exempt sector.
The day’s (possible) “to-do” list
Higher education
Trump has been vocal about reforms he wants to see in colleges and universities—with strong emphases on accreditation (especially as to addressing wokeness); taxation of endowments; and creation of a new university—the American Academy (paid for in part by the expanded endowment tax).
Separately, Trump has made clear that he wants to forcefully address antisemitism on campuses. Again, the new administration is looking at accreditation as a tool, along with enforcement of civil-rights laws, in responding to harassment of Jewish students on campus.
As his administration looks to deliver real, tangible benefits to working-class supporters, Trump likely will expand his higher-education proposals. These may include: controlling and even reducting ever-increasing tuition costs; requiring colleges—especially elite ones—to ensure socio-economic diversity in student admissions (no more of elite colleges admitting more students from the top 1% than from the bottom 60%); ending legacy admissions; and strengthening free-speech protections, among other reforms.
I would suggest addressing the hard treatment of veterans and military military by our nation’s elite colleges, too. A recent report showcases that at five of our elite colleges—Harvard, Yale, Princeton, Williams, and Amherst), there are only 189 undergraduate veteran total. By contrast, Bunker Hill Community College in Boston has 246 veterans enrolled as undergraduates. The administration can begin to address this shocking disparity by putting in place a required “Most Favored Student” policy for veterans and members of the military and ROTC that are applying to elite colleges. Under such a policy, any military person meeting the same qualifications—in terms of SAT score and high-school GPA—as any other student admitted by that college must also be accepted by that college (and given the support to succeed). Helping veterans and those currently serving to be college-ready and receive test preparation should be a part of this effort.
Accreditation reform may prove to be a less than perfect instrument for the administration to achieve its vision for colleges and universitites. The administration has many other possibilities and leverage points that can be used to accomplish its higher-ed policy goals.
As made clear in a recent report by the Stand Columbia Society, a group of former professors and alumni of Columbia, that university itself could potentially lose $3.5 billion in federal support and funding because of possible federal-government actions in response to Title VI investigations and other measures. For example, the administration could decide to end foreign-student visas for a college; Columbia has more than 13,000 foreign students and receives $800 million in tuition from them. Government grants and funding from the National Science Foundation, the National Institutes of Health, and the Department of Defense, as well as Pell Grants and Medicare and Medicaid funding for university hospitals, could all be vehicles enabling policy advancement.
The Columbia Society also notes that an increased endowment tax could annually bring in hundreds of millions of dollars alone. Certainly, an increase on the endowment tax of universities, and revisiting the “hall pass” provided by Department of Treasury regulations implementing it—is already high on the administration’s agenda.
Another key lever for federal-government policymaking is bond authority. Universities and colleges rely heavily on the tax-exempt bond market to pay for infrastructure and other costs. For example, Columbia recently issued $150 million dollars in tax-exempt bonds. Bonds are the a policymaker’s lever to move the world.
These are just highlights of some ways in which the administration can look to bring changes in culture and priorities to universities and colleges. Other taxes will certainly be on the drawing board, along with requirements for charitable exemption, as Congress moves forward, mindful of a need for additional revenues to offset costs.
Hospitals
Nonprofit hospitals, and reform of those hospitals, is a tremendous opportunity for the administration to bring real tangible benefits to working families, too. The results have been clear that since the Sen. Charles Grassley-led reforms of nonprofit hospitals included in the Affordable Care Act—while a good step forward—much remains to be done. The amount of charitable care provided by nonprofit hospitals is mostly dismal, and nonprofit hospitals continue to grind working families for unpaid bills—all while charging top rates. The American Medical Association recently joined the chorus, saying enough is enough and there needs to be reform of nonprofit hospitals and charity care.
Happily, there is a growing bipartisan consensus in the Congress—from Sens. Grassley to Sanders—calling for major nonprofit-hospital reforms. House members on both sides of the aisle also embrace reform. Nonprofit hospitals receive billions of dollars every year in federal and state tax and spending benefits ($11 plus billion in federal benefits each year alone), and there are only pennies of value in terms of charity care provided. This big-taxpayer-bucks-little-bang-benefit is unjustifiable—and it is taxpayers who are funding it, and poor working families who suffer. That for-profit hospitals are providing more charity care than tax-exempt hospitals is eye-blinking. For an administration beating the drum on getting value-for-money through DOGE, reforms of tax-exempt hospitals have to be high on the “to-do” list.
As Congress and the Trump administration look for ways to provide meaningful reform to families laboring under the burdens of high medical bills—and providing taxpayer value for the billions of dollars in tax breaks—there will be a hard look at charitable hospitals. Given the strong need for revenues (and the difficulty of reforms, and the failure of the tax-exempt hospitals to engage on providing charity care), it may be that the easiest answer is to just eliminate the tax-exemption altogether and fund those hospitals that provide a certain, specified level of charity care. Alternatively a floor of 5% charity care or greater could be imposed, as was the case historically. At a minimum, the administration could take its own steps of imposing charity-care requirements to the extent of hospitals’ financial ability—as was traditionally the case, and as recently advocated by Grassley and Warren.
Foundations and charities
Vice President-elect Vance has repeatedly made statements regarding private foundations and other charities—calling for substantive, sweeping reform, including proposing increased taxation of foundations and shrinking the size of foundations and endowments. He once floated the idea of requiring an annual payout of 20% of foundation endowments greater than $100 million. Vance has also made speeches on the Senate floor calling for increasing the taxation of university endowments, decrying the fact that universities pay less than a 2% tax on their endowments, less than American taxpayers.
Vance has much company. These practical and thoughtful private-foundation reforms have long been advocated, supported, and championed by some of the best thinkers in philanthropy on both sides of the aisle.
There could be a straightforward increase in the current payout requirement of 5% to 10%, 15%, or 20%. There could sure be an exclusion of the allowance for administrative expenses to count toward payout. Tax-exemption for foundations of more than $100 million dollars in assets could be conditioned on them having to disburse all funds and terminate within five years after the death of the primary donor, with anti-abuse rules to bar mere movement of dollars to donor-advised funds (DAFs) or other entities controlled by the donor’s heirs.
Further, as Congress looks to “pay-fors,” I anticipate consideration of allowing no estate-tax charitable deduction for gifts to foundations or DAFs, i.e, private foundations without rules. I am told by tax-writing staff that this is a significant revenue-raiser.
Working charities have an opportunity to get behind reforms that will encourage more dollars to flow to their work. Any increase in payout by private foundations alone would spur a major increase in hundreds of billions of dollars finally getting into their hands. Charities and their advocates in Washington, D.C., should lend their voices to what is possible, working with the new administration on productive reforms. They should not waste their limited time and resources on windmills at which they have been tilting for years. (How many years and dollars were wasted trying to reverse the statute on car donations, all in a failed effort to make the world safe for taxpayers to donate their Yugo that goes only in reverse and claim it’s worth $10,000 while the charity got 50 cents?). In my view, Congress bringing back an above-the-line deduction for charitable deductions is a high hurdle, for cost reasons if nothing else—although a recent proposal to offset the cost with an increase on the excise taxes of private foundations at least provides a workable solution.
Encouraging an increased flow of tax-incentivized charitable dollars to working charities could also be achieved by finally moving forward on the much-needed, common-sense reforms of DAFs in general and DAF distributions in particular—as a bill proposed by Sens. Grassley and Angus King would do. DAF reform could unleash billions of dollars into the hands of working charities. These reforms would get more charitable dollars out of warehouses and put them to work. They are practical and realizable successes that charities can achieve in Congress. Even the simple, anti-abuse reform of banning non-publicly traded donations to DAFs (or limiting them to basis) would raise billions of dollars.
If the Trump administration and Congress were to put forward these simple reforms of private foundations and DAFs—many by Vice President-elect Vance—it would mean an estimated $339 billion in donations getting into the hands of working charities that could help working families over the next three years, according to a study by the Institute for Policy Studies. Over $110 billion every year to struggling families and communities. Real change, real benefit.
Finally, I expect Congress and the administration to take a strong look at the tax-exempt sector and business income, especially the tax treatment of Unrelated Business Income Tax, or UBIT. The widely respected Tax Foundation recently published a thoughtful and considered analysis of the $3.3 trillion (!) dollar tax-exempt economy. Universities and hospitals loom large in that economy, but many other entities do, as well. I expect the Tax Foundation’s proposals to be well-thumbed and earmarked by Congress and the administration as they look both for revenues and to rein in the tax-exempt sector. A gift shop that sells a spoon with a Williamsburg crest shouldn’t receive a special tax break, as compared to a spoon sold by Macy’s.
Regulation and guidance
In addition to looking at changes in the laws, there is much at which the administration can immediately look to effect reform within its own authority. For example, just as President Trump did in his previous administration, he can issue an executive order addressing the “Johnson Amendment,” allowing for political speech by churches, by directing that Treasury not take adverse action over churches or religious organizations for political speech.
The new administration could go even further, with Treasury stating that in considering constitutional concerns and the Religious Freedom Restoration Act, the IRS will not enforce any action against political speeches from the pulpit by clergy members or political officials where the expenses directly related to the speech are less than $10,000. The administration doesn’t need to wait for Congress.
Similarly, the administration can take action to impose new reporting requirements on universities and colleges that can immediately shine a light of transparency on their actions and impact behavior. It could also move forward on dealing with at least some large endowments and encouraging greater dollars getting into the hands of working charities by increasing payout requirements, through regulation, for supporting organizations and medical research organizations.
The administration will have a host of opportunities to use a pen and a phone to bring real changes to the tax-exempt community. Elon Musk and Vivek Ramaswamy recently stated that part of DOGE’s efforts will be to look hard at all regulations, in light of the Supreme Court’s decision in Loper Bright v. Raimondo (overturning Chevron deference), for those regulations that exceed the authority provided by statute. There are many opportunities in the tax-exempt area to clean the Augean stables.
Sunrise
The new administration will bring attention to and a policy-reform focus on the tax-exempt sector that is without precedent. Congress is largely sympathetic to the new administration’s goals. Some may think the red sky at morning is ominous. The simple fact, however, is that the election results provide a tremendous opportunity for working charities to see reforms that will bring in additional hundreds of billions of dollars to help them and their important efforts.
Reforms could potentially include helping ensure that colleges and universities—especially our nation’s top ones—provide a welcoming, learning experience that is open and affordable for all Americans. They could include helping ensure that nonprofit hospitals provide meaningful charitable care to those in need and end the grinding burden of medical costs for working families. And they could include moving philanthropy back to supporting true charity.
The tax-exempt sector should embrace the possibility of the new day.
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Dean Zerbe served as Senior Counsel and Tax Counsel for the U.S. Senate Finance Committee under Chairman Charles Grassley from 2001 to 2008. He worked closely with the Senator on extensive oversight of the charitable sector, including colleges and hospitals, and was instrumental in many reforms of the charitable sector that have become law.
