The Hidden Cost of Government-Funded Nonprofits
How Government Funding Compromises Nonprofit Independence
In January 2025, the Trump administration briefly froze all new federal grants to and contracts with nonprofits. Though the policy was quickly stayed and rescinded, the episode revealed something far deeper than a temporary funding hiccup. It exposed just how dependent America’s nonprofit sector has become on the state and how fragile that dependence makes nonprofits.
This week, I published a new paper with Philanthropy Roundtable examining this issue in detail. The research traces how nonprofits’ growing reliance on government funding threatens their independence, reshapes their missions and undermines the Tocquevillian ideal of voluntary, community-driven association.
For more than two centuries, America’s voluntary associations have been the bedrock of civil society. Alexis de Tocqueville famously marveled at the way citizens built associations to solve problems and advance causes independently of government. These voluntary networks gave Americans both a sense of ownership and the habits of self-governance essential to a free society. But what happens when those same associations rely on Washington to keep the lights on?
Today, nearly one-third of nonprofit revenue nationwide comes from government sources. Among large nonprofits, those with expenditures over $1 million, almost half of revenue is government-funded. Since 2008, the value of federal grants to nonprofits has more than doubled, with most of the growth occurring after 2019. This shift has profound consequences, not just for the organizations themselves, but for American democracy.
The Risks of Becoming Extensions of the State
At their best, nonprofits exist to serve communities in ways government cannot or should not. They are local, nimble, creative and accountable to the people who donate and participate in them. But when government funding becomes the lifeline, nonprofits risk morphing into bureaucratic appendages.
Government dollars rarely come without strings. Reporting requirements, eligibility criteria and compliance mandates force nonprofits to devote more time to paperwork than to people. Studies show that even small increases in government funding push nonprofits toward higher administrative costs and more professionalized, bureaucratic operations. Instead of empowering volunteers and communities, many organizations begin to resemble contractors executing government programs.
Worse, government funding often reshapes priorities. Mission drift—where nonprofits adjust their goals to secure grants—turns once-visionary organizations into mere implementers of public policy. The result is a less innovative sector that is less accountable to its communities and less willing to challenge the state. In fact, nonprofit advocacy has declined by nearly a third over the past two decades, a telling sign of how financial dependence curbs civic independence.
Crowding Out Private Giving
Government funding doesn’t just crowd out independence; it also crowds out generosity.
Economists have long studied the “crowd-out hypothesis,” asking whether public money displaces private charitable giving. The evidence is compelling: Donors are less inclined to give when they perceive that government already funds a cause. Nonprofits, too, invest less in fundraising when public grants flow in.
Over time, reliance on government reduces the diversity and vitality of civil society. Smaller, community-based organizations lose out, while large, well-established institutions with the capacity to navigate federal grant processes dominate. The pluralism Tocqueville celebrated gives way to homogeneity and centralization.
The Slippery Slope of Regulatory Change
Recent regulatory shifts threaten to deepen this dependence. In October 2024, the Office of Management and Budget raised the “de minimis” rate, an allowance nonprofits can tack onto federal grants to cover overhead costs, from 10% to 15%. While this may sound technical, it represents a subtle but powerful incentive for nonprofits to seek more federal funding. Overhead subsidies increase, government influence expands and taxpayer burdens grow.
History offers a cautionary tale. Federal caps on overhead costs for nonprofit colleges began at 8%, rose to 15%, then 20%, and were eventually uncapped. Today, some elite universities charge overhead rates exceeding 60%. What began as a modest concession ballooned into a costly dependency. The nonprofit sector is now on a similar path.
A Civil Society Worth Protecting
Milton Friedman once observed that one of the greatest costs of an expansive welfare state is that it “poisons the springs of private charitable activity.” His warning resonates today. When the state becomes the dominant financier of charitable work, it erodes the bonds of responsibility and trust that private giving nurtures. Instead of vibrant local networks of support, we risk creating a passive citizenry dependent on bureaucratic largesse.
To be clear, government partnerships with nonprofits aren’t inherently harmful. During crises, public funds can temporarily fill gaps. But when they become a structural dependency, the costs mount: diminished autonomy, bureaucratization, mission drift and the crowding out of private philanthropy. Ultimately, what’s at stake is not just the health of the nonprofit sector, but the resilience of American democracy itself.
Tocqueville understood that voluntary associations were a check on centralized power. They taught citizens how to govern themselves, how to cooperate and how to hold authority accountable. But that civic schoolhouse withers when nonprofits answer more to Washington than to their neighbors.
The challenge before us is balance. Nonprofit leaders must resist the easy lure of government dollars and prioritize independence, innovation and local accountability. Policymakers, too, should be wary of expanding government’s role in shaping civil society. If we want a democracy rooted in active citizenship rather than bureaucratic dependency, we must preserve the independence of America’s nonprofits.
Because in the end, a nonprofit sector that merely echoes government priorities is not civil society at all; it is an extension of the state. And that is the very opposite of what Tocqueville admired—and what America still needs.