Are Large Nonprofits Still Nonprofits? A Growing Call for Tax Reform
In a provocative piece published by The Chronicle of Philanthropy, The Chronicle writes about Scott Hodge, former president of the Tax Foundation and a prominent voice in tax policy reform, who makes the case for taxing major segments of the nonprofit sector. In the article, “Meet the Man Who Wants to Tax Most of the Nonprofit World, ”the thoughts of Hodge are laid out as a sweeping proposal to impose nearly $40 billion in new federal taxes on nonprofits—particularly large hospitals, universities with massive endowments, and donor-advised funds (DAFs).
Hodge’s rationale hinges on a simple but powerful argument: some large nonprofits are operating more like corporations than charitable institutions. He points to billion-dollar endowments, profit-generating hospital systems, and financial vehicles like DAFs that can delay or avoid distributions to active charitable causes. These organizations benefit from generous tax-exempt status yet increasingly behave in ways more aligned with market-driven business models.
For instance, nonprofit hospitals, while legally charitable, often function as dominant regional healthcare systems, charging market rates, expanding aggressively, and offering executive compensation packages similar to their for-profit peers. Similarly, elite universities sit on multibillion-dollar endowments while tuition and costs for students continue to rise. In both cases, Hodge argues, the public benefit of the tax exemption is increasingly difficult to measure against the private-like behavior of these institutions.
Donor-advised funds, another focal point, allow donors to take immediate tax deductions while maintaining control over how and when the funds are distributed. In theory, DAFs promote philanthropy. In practice, many of these funds sit idle for years, effectively acting as untaxed investment accounts with no mandated timeline for giving.
Hodge’s proposal does not call for eliminating tax exemptions across the board. Instead, it suggests targeted reforms aimed at institutions that have strayed furthest from the traditional charitable model, those that act more like businesses while retaining nonprofit advantages. This, he believes, would generate revenue while restoring credibility to the tax-exempt sector.
The article surfaces essential questions for today’s philanthropic landscape: When does scale compromise mission? Have large nonprofit hospitals, universities, and financial vehicles like DAFs become indistinguishable from for-profit enterprises? And perhaps most critically—should the nonprofit tax code, originally designed for community-serving, volunteer-driven organizations, be reexamined in light of how large institutions now operate?
Scott Hodge’s case is not without controversy, but it invites a necessary debate: What does it truly mean to be a nonprofit in the 21st century—and has the sector evolved beyond its original intent?
