The war on private charity

Donor-advised funds are charitable savings accounts. Donors make annual contributions and get an immediate federal tax deduction. The value of funds appreciates tax-free. Donors decide how to give the money whenever they want. Last year, such funds collected more than $37 billion in donations. In 2018, Fidelity Charitable made $5.2 billion in donor-recommended grants, more than any private foundation.

As with other recent attempts to regulate philanthropy, the proponents of this California bill, the original version of which has been pulled but is expected to be resubmitted later this month, argue that the tax deduction donors receive means that the public should get a say over how, where, and when these donors give their money. NextGen California, a group founded by Kat Taylor (wife of Democratic presidential candidate Tom Steyer), spent almost $200,000 lobbying legislators on a number of bills, including in favor of this one, according to the Chronicle of Philanthropy. Taylor told the publication: “We want to be sure that the philanthropic deduction is given in the public interest and those funds get put out expeditiously to nonprofits who are doing work in the world.”

But there’s nothing in the law governing the tax deduction that says contributions must meet some standard of “public interest.” And who would set such a standard anyway? The deduction can be taken as a result of any gift to an IRS-verified charitable organization. That includes 29 different types of organizations whose purposes can be educational, religious, scientific, literary, or even athletic. Do all of these groups, from the National Rifle Association to Planned Parenthood, serve the public interest? It would be hard to find a single person who would agree on all of them. And Mrs. Taylor probably does not. At any rate, there is no evidence that the money in donor-advised funds is not going to charitable purposes.

California Democratic Assemblywoman Buffy Wicks introduced the bill earlier this year to, in her words, “unlock these much-needed funds.” Some advocates claim that there are millions of dollars in “orphan funds” just sitting there because the donor died and the fund doesn’t know what to do with them. But that’s rare, according to Seyron Foo, vice president for public policy and government relations at Southern California Grantmakers, a donors’ umbrella group. He tells me that every major fund (the largest ones include Fidelity and Vanguard) has a policy in place about getting the money out the door, and national standards have been created that most smaller funds have also adopted.

But Wicks argues that the legislature has a duty to ensure “tax incentives meant to encourage charitable contributions are being used as they were intended: to directly benefit the people and causes of service providers. They should not be used as a vehicle to benefit a few wealthy individuals while depriving the general public of benefits that result from direct gifts to charitable service providers.”

But it’s not as though the money put into donor-advised funds isn’t flowing to charitable service providers. On average, they are paying out funds at a higher rate than foundations. According to a report from the Manhattan Institute, they paid out 21.9% of assets, compared with 5.8% for private foundations in 2013-14. Donors are putting their money into these funds not because they don’t want to see it spent — what would be the point since they can’t use it anyway? — but because they don’t want to open their own foundation. You only need $5,000 to start a fund at Fidelity. And if they sometimes delay spending it, it’s because they don’t have the time to devote to donating it carefully to the exact causes they want right now.

Either way, many donors value their privacy. These funds have to report where the money they manage has gone in the aggregate, but they don’t have to report where each individual donor’s money went. And that is why many of the nonprofit organizations in California have also gotten on board with this legislation. An umbrella group called CalNonprofits conducted its own survey recently to find out how these groups feel about donor-advised funds. It turns out that 63% said they are “good but need to be regulated,” while only 19% said they “have some problems but regulation is not the solution.”

A post on the CalNonprofits website claims that the group’s members are worried about “dark money,” but there is a much more obvious explanation: Charities would prefer to know who their donors are so they can hit them up for more money. Anonymous donations present all sorts of challenges that nonprofit groups would prefer to sidestep.

But donors have plenty of reasons for keeping their names out of it. Some follow religious teachings that encourage donating anonymously. Within couples, a husband and wife might want to give to different (even opposing) charities, or avoid incurring the ire of friends. Gina Dalma, senior vice president of public policy and special adviser to the CEO of the Silicon Valley Community Foundation, says that some of its donors are “26-year-old hoodies who don’t want their friends to know how much money they have.” Sandra Swirsky of the Alliance for Charitable Reform, a group that lobbies on behalf of philanthropic freedom, says one of her members has funded the translation of English documents into Farsi. He has told her, “What I’m doing could prompt a fatwa against me, and I’m not interested in that.”

In an age of “cancel culture,” it is becoming more, not less, important for donors to guard their privacy. How long will it be before someone is fired from a job or shunned from polite society because he or she has given to a politically controversial cause?

In the meantime, this legislation could be the proverbial camel’s nose under the tent that allows the federal government and the states to get much more involved in how private individuals choose to spend their money. The idea that the tax deduction magically turns private funds into public ones and private institutions into public ones is becoming increasingly common. New York City recently told local museums and other nonprofit institutions that the fact that they didn’t pay property taxes should mean they have to become polling places for Election Day and the 11 days beforehand for early voting.

But repetition of a falsehood does not make it true. By this logic, the mortgage interest deduction might be used to bludgeon homeowners into using their houses for some ill-defined public interest. It’s time to stop this regulatory creep before it starts to affect the decisions of donors to give to charity in the first place.

James Piereson is a senior fellow at the Manhattan Institute. Naomi Schaefer Riley is a resident fellow at the American Enterprise Institute and a senior fellow at the Independent Women’s Forum.