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Highly endowed private colleges have been in the crosshairs for the past decade. A tax on their investment returns was first instituted in 2017 as part of the Tax Cuts and Jobs Act. That law imposed a tax of 1.4 percent on returns for institutions with more than 500 tuition-paying students and a per-capita endowment of greater than $500,000.
In one of my earlier analyses for The Chronicle, I estimated the annual cost that would be imposed on selected highly endowed colleges and universities under three different sets of proposals: an initial House proposal from January, an initial House-passed bill from April, and an initial Senate proposal from June. Now, in a table below, I show those estimates and also my latest projections based on the final bill.
Even from the perspective of an outsider closely following the proceedings, it has been difficult watching the sausage being made. Provisions have been added and removed in a haphazard fashion that generated swings in institutional tax liabilities of up to hundreds of millions of dollars. There were likely champagne corks flying and tears shed on affected campuses across the country with each shift.
The modifications made along the way include wildly fluctuating tax rates, categories of institutions being excluded and reinserted, and anti-immigrant provisions added and removed. Proposals expanded the current 1.4-percent tax rate to a tiered system with a top rate of 21 percent and then revised downward to a top rate of 8 percent. Religious institutions were excluded and then, after the Senate parliamentarian weighed in, re-included. Colleges with under 3,000 students (including Wellesley College, where I teach) were excluded at the last minute. Endowments per student that are currently based on a count of all students were ordered to be based on domestic students only, and then it changed back to all students. Yes, your head should be spinning trying to make sense of it all.
Once all is said and done, comparing current policy with the newly enacted legislation shows that a handful of institutions will pay a lot more in taxes and others that currently pay the tax will now be exempt. The impact of this bill is highlighted in the final column of the table below. Harvard University was the hardest-hit institution. Their current $56-million estimated tax payment jumped to $849 million under the April House bill and then back down to $324 million in the final bill. I assume there is no celebrating going on in Cambridge, though. Columbia University went from no tax to a $79-million tax and back to no tax. The University of Notre Dame went from $19 million currently to $190 million to $0 to a final estimate of $54 million. Don’t blink.
In the end, only 16 of these institutions will end up paying this tax. Perhaps not surprisingly, they are many of the same institutions that have been under direct attack from Republican legislators and now the Trump administration over the past year. There were swings and misses at some targets, like Columbia — the Senate parliamentarian saved them by ruling that restricting the head count to domestic students violated Senate voting rules. Other institutions, like Emory University and the University of Richmond, were collateral damage, but mostly the intended targets were hit. Other highly endowed liberal-arts colleges initially got caught up in the battle, but there are few political points to be made going after Amherst and Williams relative to Harvard and MIT.
To be sure, these institutions have some problems that need to be addressed. Campus turmoil in response to events in the Middle East and a lack of politically diverse viewpoints are legitimate concerns. High sticker prices are also often criticized, although only students from families with very high incomes (perhaps $400,000 or more) pay those levels — and these institutions are often the least expensive options for students from lower- and middle-income families. Enrolling more of these students, though, is a legitimate goal for them to pursue.
But the current spectrum of Trump-administration policies is an inappropriate response. Along with endowment taxes, these institutions are also likely to suffer financial losses associated with NIH funding cuts and restrictions faced by international students. These policies will significantly hamstring the financial operations of these institutions without addressing any of the underlying issues. We’re witnessing a political broadside, not sensible policymaking.
These institutions are among the best in the world. They provide a high-quality education to their students, who go on to become society’s leaders. They generate advances in science and technology that improve our economy and our health. The financial hit they face will impose real costs on the people who work at these colleges, the students who attend them, the communities they are in, and our country as a whole. Does scoring a few political points warrant the infliction of such pain and the squandering of such opportunity for our nation? Evidently, this administration thinks so.
