College Endowment Tax Targets Have Chance to Gain Public Support

When the House narrowly passed its tax and spending package, its plan to raise the existing 1.4% excise tax on some university endowments nearly 20-fold likely left some college administrators reeling. While the Senate could withdraw or change the modified tax, universities should take a reflective approach.

Many higher education institutions are already struggling financially. Smaller, less selective private schools and regional public schools have taken a hit. Larger institutions, including public universities, also have felt budgetary pressure—we’ve seen cuts to indirect costs, grants, and other funding sources, and potential restrictions on international students.

The House-approved tax bill’s plan to reduce funding flows to states, such as for Medicaid expansion, would mean fewer dollars available for state appropriations to public universities and colleges. Should those states wish to backfill for those cuts, it will need to take the money from non-designated sources, which are typically the sources used to fund public higher education.

For many universities already experiencing financial fragility, an increase in endowment tax is a nightmare scenario. The universities that would most significantly feel the increased tax of between 7% and 21% are generally considered elite and exclusive, however. Some selective, research-intensive public universities could be affected.

Republicans say an increased endowment tax is a way to raise billions of dollars in revenue while cutting spending. There’s certainly potential for revenue.

The nonpartisan Joint Committee on Taxation estimates the endowment provision would raise $6.7 billion through 2034. The Integrated Postsecondary Education Data System reports in its 2022–23 survey that eight private nonprofit universities had endowments averaging more than $2 million per student, totaling nearly $107 billion; 17 universities had endowments between $1.25 million and $2 million per student with endowments totaling nearly $111 billion; and 27 had endowments between $750,000 and 1.25 million per student with endowments totaling nearly $62 billion.

Some proponents point to a defensible logic behind taxing endowments, noting that significant public resources are already directed toward higher education. These include Pell grants to students, as well as research grants and contracts—areas in which universities are held accountable to taxpayers.

Endowments benefit from taxpayer support because their investment income isn’t subject to taxation. Yet, there is little to no accountability for how that income is ultimately spent.

Opponents of the bill’s endowment provision claim the proposed increase in tax represents federal government overreach that could cause cuts to financial aid, labeling it a scholarship tax. While the latter may be true to some extent, the long-term impacts on student aid and enrollment numbers are largely unknown.

The endowment tax proposal could face criticism in Republican districts if they get pushback from constituents about reduced scholarship funding and university job losses associated with the tax. Intraparty divide initially slowed the tax measure’s movement in the House and could further slow progression in the Senate.

Some elite universities proactively made attempts to reinforce how their endowments make a positive societal difference by raising their family income thresholds for students to go to their schools for free. That’s great for the students who benefit, but in reality, these schools can only educate a finite number of people.

Perhaps the bigger policy question is how to get more people who don’t have financial means through college to help fill the US employment gaps that are pervasive across industries and acute in several including teachers, social workers, nurses, financial services, and other high-need occupations.

History has shown that once a tax policy proposal surfaces, it tends to stick around for a while, even if it doesn’t immediately become law. Whether this particular policy initiative comes to fruition and takes effect in 2026, or later down the road, university operations inevitably will face financial cuts, forcing them to change their business and educational models because their revenue is going to shrink.

Forward-thinking universities are likely already planning for increased endowment taxes whether the current bill makes it over the finish line. They know the issue isn’t going away from a policy perspective, and they know the financial pressures in higher ed will continue to mount.

Those pressures relate directly to protracted and precipitous decline in public trust and growing skepticism about the value of college. Universities must start analyzing these issues, acknowledge choices that have alienated many, and begin to take advantage of this opportunity to rebuild the public trust while also practically addressing a fragile financial status.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Jessica Jeane is director of tax policy, national tax practice, at Baker Tilly and has more than a decade of experience in tax policy and law.

Dan Greenstein is managing director of Baker Tilly’s higher education practice and was chancellor of the Pennsylvania State System of Higher Education.

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