Will We Get a More Moderate Endowment Tax?

The vagaries of the political process continue to shape the potential impact of a tax on the endowments of wealthy colleges and universities. Earlier this week the Senate Budget Committee revealed its proposal. It is considerably more moderate than those that came before it. If enacted, affected institutions will still face significant costs, but they would avoid the severe consequences posed by earlier proposals.

How did we get here? An endowment tax was first introduced as part of the Tax Cuts and Jobs Act (TCJA) of 2017. The main purpose of that legislation was to cut income taxes, but it also included provisions that applied an endowment tax. Today, under the TCJA, institutions with endowments exceeding $500,000 per student are required to pay a tax of 1.4 percent on their net investment returns. In 2023, according to data from the Internal Revenue Service, 56 colleges paid the tax, and their combined taxes amounted to around $380 million. That provision is set to expire later this year, prompting a broader legislative effort to extend the TCJA, including the endowment tax.

Unsatisfied with this approach, several Republican proposals have now emerged to dramatically raise the tax rate. In January, Politico obtained documents from the House Budget Committee that would have increased the endowment tax to 14 percent. I modeled what this enormous increase would mean for colleges in a previous piece for The Chronicle — for many institutions, the costs would have been staggering.

That, it turned out, was only the beginning. A month ago, the House of Representatives released its proposal as part of the “One Big Beautiful Bill Act.” It marked a significant shift from current policy — not just through higher rates but also through a new tiered tax structure. Institutions with larger “student-adjusted endowments” (more on that soon) would pay higher rates. Those with the largest endowments would face a 21-percent tax on investment returns, matching the corporate tax rate.

The House bill also would change how endowments per student are calculated. Currently, “students” are counted as full-time equivalent enrollment. Under the new approach, only domestic students would be counted — hence, the term “student-adjusted.” This change would inflate measured endowments per student, particularly at institutions with large international student populations, pushing some into higher tax brackets.

When I compared the new House proposal to the flat 14-percent rate previously floated, and incorporated the revised student-counting method, the impact varied: Some institutions would pay significantly more, others less. Some institutions with religious affiliations (like the University of Notre Dame) were among the biggest winners, as they would likely be exempt from the tax in the House bill.

This week’s Senate bill retains the House’s tiered structure, the use of domestic-student counts, and the religious exemption, but it applies much lower tax rates. For institutions with student-adjusted endowments between $750,000 and $2 million, the tax drops from 7 percent or 14 percent under the House bill to 4 percent. Colleges in the top bracket — those above $2 million — would pay 8 percent instead of 21 percent. Here’s how it breaks down:

These differences would lead to dramatic changes in the financial impact of such a tax, as shown in the table below. Institutions in the top tier would save hundreds of millions of dollars annually under the Senate plan compared to the House version — though they would still owe hundreds of millions. Those that moved into the new 4-percent bracket would see their tax liabilities cut by nearly half or even by almost three-quarters, depending on which House bracket they would have fallen into.

It’s important to note that these “savings” under the Senate bill are only relative to the enormous burdens proposed in the House bill. Even with the Senate’s more modest rates, institutions would still face a substantial increase in tax payments compared to current law. The pain would be real — but far less than what the House bill would have inflicted.

What matters now is how House and Senate negotiators reconcile their differences. A compromise bill is virtually certain: Without one, the broader TCJA income-tax cuts would expire, and avoiding that outcome is a very high priority for this administration and Congress. As for the endowment tax, the final outcome will almost certainly fall somewhere between the two provisions included in the two separate bills. A giant endowment-tax increase is coming. Whether it merely hampers or severely burdens affected institutions seems to be the only remaining question.