Over the last century, large public and private investments in university research programs have propelled the United States to become a world leader in scientific research (Figure 1). The majority of this investment originated from public funding through federal organizations such as the National Science Foundation (NSF) and National Institutes of Health (NIH), which in recent years have distributed over $50 billion in research grants annually (National Science Board). Private philanthropy also plays an important role, accounting for approximately 30% of science research funding at the 50 universities with the highest expenditure on scientific research and development (R&D) (Murray).

Since World War II, universities across the United States have relied heavily on government grant funding to establish new science and engineering departments and conduct research. Starting in the 1940s, concerns about the impending war led President Franklin D. Roosevelt to begin investing heavily in a wide variety of wartime research projects ranging from espionage and health to weaponry. At MIT, this investment funded the development of radar technology, which is often cited as the key component to the American victory in World War II (Saad). In the 1950s, Congress created the NSF to continue this work and implement a national policy for promoting and funding scientific research in the United States (Jahnke). As a result, many universities simultaneously became hubs for the foundational basic science research that drives scientific innovation and is highly dependent on federal funding.

However, the landscape of higher education research funding in the United States is rapidly changing. Pauses and cutbacks in federal grant programs, the introduction and proposed increase of university endowment taxes, and decreased tax incentives for individual charitable gifts pose sizable risks to university research programs and the funding model that has driven decades of U.S. scientific innovation.

 

Modern Threats to University Research

Top research universities currently face two major challenges to their funding models from the federal government: decreased availability of federal funds and the introduction and proposed increase of endowment taxes. On January 27, 2025, a memo from the United States Office of Management and Budget (OMB) called for a pause in federal agencies disbursing grant funding, loans, and other kinds of financial assistance. Further, the OMB demanded of each agency: “to the extent permissible under applicable law, Federal agencies must temporarily pause all activities related to obligation or disbursement of all Federal financial assistance, and other relevant agency activities that may be implicated by the executive order” (Vaeth).

While the memo was rescinded on January 29^th, many federal grant recipients, including large research universities and their employees, face uncertainty regarding their ability to access pending payments or rely on government funding in the near future. Researchers like Julia Van Etten of Rutgers University, whose work on the DNA evolution of microbes won her a prestigious NSF grant, found their funding cut unexpectedly despite the memo’s revocation and orders from a federal judge to temporarily unfreeze funding (Boodman). For Julia, this meant missing a paycheck. In an interview with STAT, she shared, “We just have no idea when we’ll be paid. Most of us are living paycheck to paycheck, so even getting a paycheck a week late is like a huge deal to us” (Boodman). Beyond the immediate financial implications, Julia was left with uncertainty around her professional and financial future.

Federal grants have been the primary source of academic research funding for decades (Figure 2), resulting in potential losses of tens of billions of dollars in promised or expected research funding if the pause were to be continued (NSF). For example, Harvard University received approximately $1 billion in sponsored research funding in fiscal year 2024, 68% of which was federal. In addition to the $1 billion in sponsored research, Harvard allocated an additional $489 million of their own funds to their research endeavors (Harvard University). Even with massive investments by the university, cuts to federal research funding at Harvard would impact not only research output, but also the availability of research positions, thereby eroding the pipeline for training the next generation of researchers. While the recent OMB memo has turned the issue of decreased availability in federal funding into a national debate, the influence of the underlying tax system receives less public acknowledgment.

 

Taxation and Philanthropy

According to the Association of American Universities, the Internal Revenue Service defines most U.S. public and private colleges and universities as 501(c)(3) organizations. This designation serves as recognition by the government that these institutions provide public services important enough to qualify them for broad tax exemptions. As a result, universities have for centuries benefited from little to no taxation on their endowments.

The endowment tax was introduced in 2017 as part of the Tax Cuts and Jobs Act (TCJA). The TCJA required that universities with more than 500 students who have over $500,000 in their endowment per student would be subject to a 1.4% tax on their net investment income (Tax Policy Center, Brookings Institute). More recently, legislation has been introduced to increase the endowment tax to between 21-35% (United States Congress, House, Endowment Tax Fairness Act of 2025 and United States Congress, House, Charitable Act of 2025). If put into effect, the increased endowment tax would result in top research universities paying billions of dollars in taxes and further limitations on the ability for universities to fund their research projects, degree programs, and associated academic departments. To return to our earlier example of Harvard, philanthropy is the single largest category of revenue for the university (Figure 3). In fiscal year 2024, 45% of Harvard’s operating revenue stemmed from philanthropic commitments. Of this, 37% were distributions from the endowment. An increased endowment tax would require a fundamental restructuring of Harvard’s operating budget, risking mass layoffs, cuts to student fellowship or scholarship support, and decreased funding for novel research projects.

While the majority of research funding comes from federal sources, philanthropy provides essential support for risky, early-stage projects that may need preliminary results to provide proof of concept for later federal grant applications (Science Philanthropy Alliance). Over the last several decades, the portion of individuals who opt to make tax-deductible charitable donations has decreased. Between 2000 and 2018, U.S. household participation in philanthropy decreased from 66% to under 50% (Indiana University Lilly Family School of Philanthropy). Part of this trend may be attributable to changes in the underlying tax system, which have decreased the availability of tax incentives for individual donors.

In addition to decreases in federal support and individual philanthropic participation, the same TCJA that introduced the endowment tax also provided sweeping changes to individual taxation and filing procedures. In particular, an increase to the standard allowed deduction and the estate tax exemption resulted in decreasing or removing incentives for taxpayers to make charitable gifts.

For U.S. taxpayers, one benefit of making charitable gifts is the potential to reduce taxable income by taking a charitable gift deduction. To reduce taxable income through such a deduction, the taxpayer must itemize donations on their taxes rather than taking the standard deduction. By increasing the standard deduction, the TCJA effectively removed the incentive for individuals below the standard deduction threshold to make charitable gifts to receive tax benefits. The Bipartisan Policy Center reports that the TCJA resulted in a 57% decrease in filers claiming charitable deductions on their taxes between 2017 and 2018. The Tax Policy Center estimates that taxpayers decreased the amount of their philanthropic giving by 4-7% as a result of these changes (Rosenberg).

The TCJA also introduced a higher estate tax exemption threshold, doubling the amount of wealth that could be passed on to beneficiaries without triggering the 40% estate tax. For individual filers, this represented an increase from $5.5 million to $11.4 million or for joint filers an increase from $11.1 to $22.8 million in 2018, which continues to be increased yearly for inflation (Bipartisan Policy Center). If the TCJA is extended, the United States Congressional Budget Office estimates that the increased exemption on estate taxation would result in $167 billion in lost tax revenue between 2025-2034, money that could otherwise be reinvested in public programs, infrastructure, or research initiatives. A change in estate tax is also likely to influence charitable giving, as estate taxes do not apply to gifts made to charities. Donors often choose to include philanthropy in their estate plans to ensure that their beneficiaries receive the maximum allowable inheritance without paying the 40% estate tax. Increasing the estate tax exemption removed an incentive to make charitable contributions during estate planning for those whose assets lie between the previous allowable exemption and the new amount. Therefore, an individual donor is less likely to include donations to universities as part of their estate plan.

 

The Impact of Donor-Advised Funds on Giving

Further complicating the issue of availability of private philanthropic funding, the proliferation of donor-advised funds (DAFs) has resulted in the introduction of intermediaries between donors and charities. While DAFs can give a donor increased flexibility, they carry the risk of being absorbed by the sponsoring institution without a donor’s consent and reduce the flow of philanthropic dollars into charities by holding gifts for decades or in perpetuity.

DAFs are charitable giving vehicles that allow donors to make gifts into a DAF, take a charitable deduction for the gift, invest the donation while in the DAF, and distribute the funds to a charity later. These funds have become very popular for donors: they can receive their initial tax deduction without choosing a final charitable destination for their gift, and their donated funds can grow tax-free until they decide on a final charitable recipient. DAFs are sponsored by charitable institutions, such as universities and other 510(c)(3) organizations, or financial institutions like asset management companies.

DAFs are intended to allow donors to distribute their principal donations and associated capital gains from the growth of the investment to the charity of their choice. Legally, however, a DAF is owned and controlled by the sponsoring institution, not the donor. While the sponsoring organization almost always follows a donor’s wishes in distributing funds, the organizations are not required to. In some extreme cases, the organizations may have a legal requirement to use the funds for other purposes. For example, when the National Heritage Foundation filed for bankruptcy in 2009, all of its donated funds, including approximately 9,000 DAFs totaling $25 million, were seized to pay debts (Jacobs).

According to a 2021 report from the Boston College Law School Forum on Philanthropy and the Public Good, giving to commercial DAFs has increased significantly since their 1991 introduction (Figure 4), but the percentage of disposable income donated by individuals has not increased, hovering consistently around 2% from 1979 to 2021. The funds that individuals have been donating have increasingly been allocated toward foundations and DAFs, which have experienced a 460% increase between 1991 and 2019. These facts would be uninteresting if not for one important clarification: because DAFs are not required to distribute their funds, these donations are often invested to allow those assets to appreciate over time instead of being distributed to charities.

Between 1985-1990, 94.1% of all individual giving went directly to working charities. By 2014-2018, only 71-75% of philanthropic dollars given through direct donation, DAF distribution, or grants from private foundations reached charities, with the remainder left in associated fund accounts, sometimes indefinitely (Boston College Law School Forum on Philanthropy and the Public Good). This report estimates that the lack of fund distribution from DAFs and private foundations results in roughly $300 billion in losses for charities over a five-year period. Roughly 14% of private philanthropic dollars in the U.S. are allocated toward the education sector. As a result, the lack of distributional requirements placed on DAFs amounts to $42 billion that is not being put into use for education (Indiana University Lilly Family School of Philanthropy). While this sum still would not replace annual federal funding, it could be an important revenue source if federal funding is decreased.

 

Future Directions

To protect the availability of philanthropic funding, changes have been proposed to the tax code; new measures have also been introduced intended to ensure that charitable gifts made to private foundations or DAFs are distributed to charities. On January 28, 2025, a bipartisan Charitable Act (H.R. 801) was introduced in Congress to amend the tax code to allow a Universal Charitable Deduction of up to one-third of the amount of their standard deduction (approximately $5,000 for individuals/$10,000 for joint filers) for taxpayers regardless of their decision to itemize or take the standard deductions. The Association of Fundraising Professionals and The Nonprofit Alliance have advocated for this change, as they estimate it will increase the incentive for individuals to make charitable gifts. If put into effect, this incentive could help reverse the trend seen across philanthropy of decreased participation in giving, providing an opportunity for donors to renew their support or give for the first time.

Similarly, organizations like the Charity Reform Initiative at the Institute for Policy Studies (IPS) are proposing oversight and monetary distribution rule changes for DAFs, private foundations, and nonprofits (Collins). The IPS proposes reforms that include–but are not limited to–requiring payouts for DAFs within three years, including income earned on principal investments, ensuring that tax deductions are taken only after distribution to an operating charity or charities, and setting stricter requirements for the nonprofit status of DAF-sponsoring organizations. Together, these suggested changes would benefit university research programs by incentivizing charitable giving and increasing the percentage of tax-deductible funds distributed to charitable organizations. However, these changes alone are likely not enough to counteract the mounting federal pressures facing universities or offset the decreased availability of federal funds.

Given the concurrent threats to different university research funding streams, universities must advocate for policies that would secure both public and private sources of funding for their research programs. At the federal level, universities need to advocate for reinstatement of grant support for their individual research projects, programs to ensure reliable federal revenue streams, and the lowering or abolishment of endowment taxes. To bolster individual philanthropic funding, universities should also consider advocacy in favor of tax laws and federal regulations that incentivize and amplify the power of private philanthropy. Without the balance of support from public and private funding sources, U.S. universities will be unable to maintain their current scientific research output, resulting in catastrophic losses to scientific understanding, economic and industry advancement, and the long-term public good.

Note: This paper reflects the literature as of April 2025.

 

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