Endowment Tax Eyed After Supreme Court Affirmative Action Ruling

Universities are spending hundreds of thousands of dollars to kill a tax on their multibillion-dollar endowments, an effort expected to heat up as legacy admissions are thrown back into the congressional spotlight.

The 1.4% tax on university endowments will be an area to watch after the Supreme Court effectively ended race-based affirmative action and as lawmakers seek to target rich universities that have exclusive admissions. Republicans imposed the tax on endowments in their 2017 tax overhaul as a way to raise revenue for the tax cuts.

The levy applies to more than two dozen schools with more than 500 students and whose endowment is valued at more than $500,000 per student, including Harvard, Yale, and Princeton. Harvard tops the list with the biggest US endowment of $50.1 billion this year.

Congressional proposals to dial up the tax, phase it down for good-actor colleges, and to use the funds to support low-income students may get renewed looks as lawmakers turn to legacy admissions following the Supreme Court decision, former staffers said.

Some Republicans and Democrats slammed universities’ use of legacy programs following the June ruling. For Democrats, stamping out legacy policies would help boost the diversity of student bodies, while it gives Republicans—some critical of so-called elite universities—an opportunity to push more populist policies.

Altering the endowment tax to achieve those goals could lure a bipartisan coalition, said Dean Zerbe, a former tax counsel for Sen. Chuck Grassley (R-Iowa) when he led the Senate Finance Committee.

With some provisions of the 2017 tax law expiring and the end of affirmative action, the time is ripe for congressional action, said Michael Dannenberg, a former education counsel to the late Sen. Ted. Kennedy (D-Mass) and former Obama administration education official.

The tax doesn’t sunset with much of the 2017 cuts that are set to end in 2025, but the need to revisit the law will offer an opportunity to review other provisions as well, he said.

“Now is the time to introduce new tax proposals to socialize them among members of Congress and get policymakers comfortable,” Dannenberg said.

Senate Finance Committee Chair Ron Wyden (D-Ore.) said he’s looking for opportunities to go after legacy admissions practices.

“I’m not going to rule out anything at this point in terms of reform,” Wyden said last week.

On the Table

While some Democrats opposed the tax—Ways and Means Ranking Member Richard Neal (D-Mass.) has called it punitive—others have supported proposals that would phase out the tax for universities if some of their endowment goes to low-income students.

“Let’s create an incentive for universities to devote more of their resources to financial aid,” said Rep. Brendan Boyle (D-Pa.), who sponsored such legislation last Congress.

Republicans, too, have legislation to revise the policy. Rep. David Joyce (R-Ohio) said he’s planning to reintroduce a bill that would hike the tax to 10%.

More than a dozen universities reported lobbying on endowment tax issues the first quarter, which ended March 31. While some were vague, Princeton University reported supporting Boyle’s proposal and opposing Joyce’s.

The Boyle bill is a more palatable idea than an outright hike of the tax, said former Vassar College president Catharine Hill.

“That would at least be an incentive for these institutions to spend resources on need-based financial aid,” she said, adding that the endowment tax as it stands takes those resources away.

Mirroring Massachusetts

Following the Supreme Court decision, Democratic state lawmakers in Massachusetts introduced a bill that would tax rich colleges that favor families of alumni and donors in admissions policies. The money raised would go to community colleges.

Similar proposals—whether it would be to give the revenue to community colleges, historically Black colleges, low-income students, or some combination—may be considered on the federal level, Zerbe and Dannenberg said.

There’s some precedent for bipartisan cooperation: Sen. Chris Coons (D-Del.) had teamed up with former Sen. Johnny Isakson (R-Ga.) on a bill to encourage colleges to expand access for low-income students or else pay a fee. Other lawmakers, too, have legislation that would ban legacy admissions. Wyden last Congress introduced a bill that would end tax breaks for donations made to influence admissions decisions.

Grassley also has a history of nudging colleges on affordability issues with the tax code, an issue he took on as chair of the Finance Committee.

“There’s a ripe environment to move on this, or to begin to move on this,” Dannenberg said, adding, “but it’s not like something’s going to happen overnight.”