By Brad Brooks
(Reuters) -The spending bill passed by the U.S. House increases a tax the richest private universities pay on their endowment investment gains, a move proponents say reins in “woke” schools but that critics say will wind up hurting the poorest students the most.
Tucked within U.S. President Donald Trump’s massive tax and spending bill the House narrowly passed on Thursday is a proposal to increase a tax that some universities pay on the investment returns of their endowments from 1.4% to as high as 21% for some of the most elite colleges in the country.
The measure, part of the bill headed to the Republican-controlled Senate, is considered another front in Trump’s attack on elite colleges that he says are overrun by left-wing extremist thought and are cradles of anti-American and antisemitic movements. On Thursday, the Trump administration revoked Harvard University’s ability to enroll foreign students, a move the university said was illegal.
Representative Jason Smith, a Republican of Missouri and chairman of the House Ways and Means Committee, said shortly after his committee passed the bill that “for too long, universities have received beneficial treatment from our tax code while disregarding the interest of taxpayers.” A fact sheet Smith put out states that the tax “holds woke, elite universities that operate more like major corporations and other tax-exempt entities accountable.”
Premier universities say the bulk of most endowments is attached to specific projects as mandated by donors. So if they are spending more money on taxes, they will not be able to make up for it from their endowments. Instead, they will spend less elsewhere.
Luisa Rapport, a spokesperson for Stanford University, said the proposed tax hike “will directly reduce financial aid for undergraduates, support for faculty and graduate students, and funding for research programs.”
Kimberly Allen, a spokesperson for MIT, said the proposal is “basically a tax on national research and student aid, and at MIT alone it would cut hundreds of millions of dollars from our budget each year.”
EXCELLENCE, ACCESS AT RISK
During Trump’s first term in office, the current 1.4% tax was levied on schools whose per student endowment was $500,000 or more – that is, the size of the endowment divided by the number of full-time students.
In 2023, 56 private schools paid that tax, and total receipts were about $380 million, according to the IRS.
Under the new proposal, schools with a per student endowment of $2 million or more would pay 21%. International students would not count in that denominator under the bill, meaning schools with large populations of foreign students, like many of the elite universities Trump has targeted, would be punished.
Schools with a per student endowment of $1.25 million to $2 million would be taxed 14%; schools with a per student endowment between $750,000 and $1.25 million would be taxed 7%; and those with endowments of $500,000 to $750,000 per student would be taxed 1.4%.
The American Council on Education, a higher education lobbying and advocacy organization with 1,600 members, has fought the endowment tax since it was first created. Steven Bloom, who specializes in tax issues and endowments at the council, said the new proposal “takes very bad tax policy passed in 2017 and makes it more expensive and more complicated.”
Phillip Levine, an economics professor at Wellesley College, estimates the new tax would cost elite universities like Harvard, Yale, Stanford, MIT and Princeton, between $400 million and $850 million a year each.
Levine said that despite having some of the highest tuition prices, elite Ivy League schools with large endowments are able to offer massive financial aid packages for kids from poorer backgrounds.
“These are institutions that can offer excellence and access for lower-income students,” Levine said. “Both of those are at risk in the presence of a large endowment tax.”
Laura Wirick, a managing principal at Meketa Investments, a consultancy firm that advises endowments on how to allocate money, said if the highest proposed tax rate of 21% goes through, it may push money away from elite schools as donors “might not donate funds because they might be best put to work with a tax-exempt institution.”
(Reporting by Brad Brooks in Colorado; Additional reporting by Carolina Mandl in New York; Editing by Donna Bryson and Stephen Coates)
