Tucked into the sprawling Republican reconciliation bill that has mostly garnered attention for its Medicaid cuts is a major tax break for the nation’s wealthiest liberal-arts colleges.
Fourteen such colleges were originally facing tax rates as high as 21 percent on their annual endowment returns. Now they’re getting off scot-free, because the bill that narrowly passed through Congress and was signed into law on July 4 exempts institutions enrolling under 3,000 tuition-paying students. In fact, most such colleges will get millions of dollars back, according to a Chronicle Review analysis by Phillip Levine, a Wellesley College economist.
Under President Trump’s 2017 tax overhaul, private colleges enrolling over 500 tuition-paying students were subject to a 1.4-percent tax if they had an endowment-to-student ratio of over $500,000.
“I can’t even tell you the pendulum swing of all this,” said Anne F. Harris, president of Grinnell College, in Iowa. Grinnell went from paying $2.4 million under the current tax, to potentially $30 million under the initial bill that passed the House of Representatives, to now being exempt altogether. Its endowment was valued at $2.67 billion as of last year.
The tax break is a huge win for Grinnell and the 20 or so small liberal-arts colleges that banded together in a joint lobbying effort — making the case to lawmakers that their endowment returns are critical to fund their financial-aid programs, cover operational costs, and contribute to their communities.
The colleges that joined together are in similar situations: Their financial models rely on endowment interest, and many are located in rural communities. Eleven of the 14 colleges that would have been subject to the top three endowment-tax rates under the House bill — 7, 14, and 21 percent — enlisted lobbying and consulting firms in recent weeks, according to disclosure records.
The final version of the legislation also benefits other colleges with small enrollments, such as the Juilliard School, which was previously staring down a 21-percent tax, and medical institutions like the Medical College of Wisconsin and Baylor College of Medicine, which would have faced a 7-percent tax.
Fifty-six colleges paid the original 1.4-percent tax in 2023, bringing in $380.9 million, according to the Internal Revenue Service. Williams, Amherst, Wellesley, Pomona, and Swarthmore Colleges all paid over $3 million per year, according to calculations by Levine, the Wellesley economist.
Pomona has forked over $16 million in taxes since the 2017 law took effect, according to its president, G. Gabrielle Starr. Starr said in a statement to The Chronicle that the tax break was the outcome of “months of concerted effort” to lobby against the proposal and to educate politicians on how small colleges use their endowments.
The tax exemption for liberal-arts campuses is due at least in part to Republicans’ desire to spare certain religious colleges from liability. A proposed carve-out for faith-based institutions was struck down by the Senate parliamentarian, who determines which provisions fit the narrow parameters of a reconciliation bill. Raising the enrollment threshold was Plan B.
But the “Small Colleges Coalition” also waged a tenacious campaign — aiming to demonstrate that higher education is not just large research universities, but that there’s “multiple scales within the sector,” said Harris, Grinnell’s president.
That meant explaining to lawmakers that small liberal-arts colleges actually rely on endowments to make tuition more affordable and support local economies — goals that are shared by Republican politicians.
Sixty percent of Pomona’s financial-aid budget comes from endowment revenue, The Chronicle previously reported. At Grinnell, that figure is 68 percent, Harris said.
The affected colleges are often their town’s largest employers and put endowment money toward student programs that encourage spending at local businesses. Swarthmore, for example, subsidizes public-transportation passes for its students and offers programs allowing them to eat at local restaurants as part of their meal plans. At Grinnell, endowment returns helped fund a maternity ward at the local hospital.
Members of Congress had concerns about “higher ed splitting off into the haves and have-nots, that there are some schools that have large endowments and some schools that don’t,” Harris said.
“There was the sense that something’s wrong in the sector if there’s this much disparity between colleges who have big endowments and those who don’t,” she said. “Those are decades-long journeys to get to those disparities, so I’m sympathetic to that.”
Meetings on the issue with members of the Iowa delegation, including Sen. Chuck Grassley, a Republican, were often conducted in “15-minute increments,” a contrast to the “highly deliberative world of higher education.” That required Harris to refine a quick elevator pitch.
In addition to phone calls and email correspondence, Harris said she was able to meet with representatives in person twice, once at the end of April and again in mid-June. She found that lawmakers were responsive and interested in learning more about how the college operates.
Given the strained ties between the federal government and higher education, she said, this kind of relationship-building is a promising sign.
