Legacy Policies Like Harvard’s Are Now a Legal and Tax Target

Colleges and universities that give admissions preference to children of donors and alumni parents have historically avoided constitutional scrutiny. But in the wake of the Supreme Court’s decision effectively ending race-based affirmative action, and a recent federal civil complaint against Harvard University, institutions of higher education can no longer assume that these policies will easily prevail in legal challenges.

The constitutionality of legacy admissions policies has only been litigated once in federal court. The US District Court for the Middle District of North Carolina determined in Rosenstock v. The Board of Governors of the University of North Carolina that the university’s legacy admissions policy neither violated the Equal Protection Clause nor violated the Privileges and Immunities Clause, but critics argue that Rosenstock is “neither binding nor persuasive to future courts.”

Studies indicate that legacy and donor policies disproportionately benefit white applicants and systematically disadvantage minority students by perpetuating patterns of racial and social discrimination. Accordingly, federal courts might find that legacy preferences have a disparate impact on people of color in violation of Title VI of the Civil Rights Act of 1964.

Alternatively, federal courts might apply strict scrutiny, which is the standard of review that is least deferential to the challenged policy, rather than rational basis scrutiny, which is the standard of review that is most deferential to the challenged policy, to determine that legacy preferences violate the Equal Protection Clause of the 14th Amendment.

In addition to the vulnerability of legacy and donor admissions to Equal Protection and Civil Rights Act challenges, there’s now a state-level challenge in Massachusetts, in the form of a newly proposed tax bill targeting legacy admissions.

Legacy Admissions Tax Bill

Massachusetts institutions now need to consider the potential financial impact of a recently proposed bill to tax any higher education institution that: considers “legacy status as a factor in admitting a student applicant;" considers “a student applicant’s relationship to a past, current or prospective donor to the higher education institution as a factor in admitting a student applicant;” and carries out “an early decision plan.”

Although the connection between early decision programs and legacy or donor preferences isn’t intuitively obvious, studies indicate that students with demonstrated financial need, public school students, and minorities are a disproportionately low percentage of the early decision applicant pool, and that legacy applicants are a disproportionately high percentage of the early pool.

The legacy admissions tax is calculated as a percentage of the school’s annual endowment, ranging on a sliding scale from 0.01% to 0.2%. The lowest 0.01% rate would apply to offending institutions with an annual endowment per student of less than $50,000; the highest 0.2%rate would apply to offending institutions with an annual endowment per student of greater than $2 million.

Because Harvard’s endowment for fiscal year 2022 is $50.9 billion, or approximately $7.1 million per student, Harvard would be subject to the highest 0.2% rate and would be assessed an estimated $101.8 million. The tax collected would be designated as a public service fee and distributed to select Massachusetts community colleges.

Institutions with significant legacy admissions tax exposure need to evaluate the likelihood of success should they decide to challenge the assessments. They also need to consider the impact that defending these policies will have on their reputations and relationships with local communities.

Commerce Clause Arguments

Those that are willing to tolerate public relations challenges might consider a Commerce Clause challenge. The main obstacle to a Commerce Clause argument is that the tax is facially neutral and non-discriminatory: It’s unrelated to institutions’ treatment of out-of-state applicants compared to that for in-state applicants and doesn’t provide any commercial advantages to in-state institutions.

Facially neutral taxes can still violate the Commerce Clause if they result in an undue burden on interstate commerce (see Bibb v. Navajo Freight Lines, Inc.), but the Supreme Court recently clarified in National Pork Producers Council v. Ross that additional costs of complying with a challenged state law, in themselves, are insufficient to establish a burden on interstate commerce. In his concurring opinion, Chief Justice John Roberts maintained that compliance costs in addition to “other factors”—such as “significant delay in an operation where prompt movement may be of the essence”—could constitute a burden on interstate commerce.

Although it might be difficult to establish that a tax on legacy and donor preferences imposes an undue burden on interstate commerce, the tax on early decision programs is an easier target.

Massachusetts institutions that use early decision programs should be able to establish that the tax places them at a competitive disadvantage by not being able to offer admission to highly qualified candidates at the same time as out-of-state institutions. Massachusetts also would have a difficult time arguing that taxing early decision programs is justified by its interest in discouraging policies that have disparate impacts on people of color.

Unlike legacy and donor preferences, the connection between early decision programs and racial disparities is more attenuated because these programs are based on the timing of the applicants’ decisions rather than the applicants’ lineage.

‘Parking Ticket’ or Change Catalyst?

The Harvard Crimson Editorial Board recently argued that a $100 million state tax on a $50 billion annual endowment is like an “elite university version of a parking ticket” and perpetuates the same “abhorrent cash nexus present in legacy and donor admissions.” The proposed tax, just like the policies it ostensibly targets, allows the cycle of injustice to continue as long as a certain price is paid. The board is correct that the proposed tax on Harvard is small compared to its endowment, but a $100 million liability could still serve as a catalyst for meaningful change.

If the legacy admissions tax passes, Massachusetts colleges and universities would need to make a difficult decision.They’d need to wage a costly battle against the Massachusetts Department of Revenue, both in terms of legal fees and public relations; classify the tax as another cost of doing business and retain the same admissions policies; or follow the lead of MIT and Amherst, which don’t offer legacy preferences.

Even if certain schools decide to continue their legacy and donor policies despite the additional exposure, the legacy admissions tax will prompt many others to reevaluate the role that these preferences play in their admissions decisions.

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

Matthew A. Morris is a tax partner at Sherin and Lodgen, a law firm in Boston. Sherin and Lodgen attorney Julia Royce contributed valuable information to this article.