GOP's proposed endowment tax hike

The House Ways and Means Committee released its version of a tax bill that includes a massive hike to the university endowment tax that, if signed into law, could severely harm operations at some of the region's most prestigious schools.

In 2017, during Trump's first term, Congress passed a 1.4% tax on investment income from university endowments that have at least $500,000 per student and at least 500 students — which translates to a minimum endowment of $250 million, although the threshold is larger for bigger universities. In 2023, 56 institutions cumulatively paid $380 million in endowment taxes.

The House Ways and Means proposal would impose a graduated endowment tax. Institutions with endowments of $500,000 to $750,000 per student would still pay the 1.4% tax. As the size of the endowment grows, however, the investment income would be taxed at 7%, 14%, or as high as 21% for schools with endowments of at least $2 million per student.

What does that mean in real dollars? Wellesley College economics professor Phillip Levine, in a spreadsheet shared with the editorial board, calculated that nine schools would hit the top tax rate — including, in New England, Harvard University, Yale University, Massachusetts Institute of Technology, and Amherst College. Harvard, Yale, Stanford, Princeton, and MIT would each owe more than $410 million in taxes a year, with Harvard topping the list at $849 million.

The original endowment tax was modest enough that colleges could incorporate it into their budgets. The proposed tax hike would almost certainly require institutional cuts.

It's true that Harvard has a lot of money. There are legitimate disagreements over how much an elite institution like Harvard, which like other nonprofits is tax-exempt, should pay in taxes. But there's a reason Harvard is Harvard — a school that does groundbreaking research while training the next generation of leaders and entrepreneurs. That reason is money: Harvard has resources to invest in students, research, facilities, and technology. Harvard reported a $6.5 billion operating budget in fiscal 2024, of which $2.4 billion came from distributions from its $53.2 billion endowment. While Harvard's sticker price is a high $86,926, Harvard also offers enough financial aid that any student with family income below $200,000 can attend for free.

"The problem is you're taking the preeminent educational institution in the US and probably the world, which gets that way because they have the resources to be able to finance everything they do, and now you're undercutting that," Levine said. "That has significant losses not just for the Boston economy but for the country as a whole."

Similarly at MIT, income from the endowment and other investments accounts for 40 percent of the college's operating budget. MIT also offers free tuition to any student with family income below $200,000. MIT spokesperson Kimberly Allen said the endowment tax proposal is "basically a tax on national research and student aid." "A tax of this magnitude would seriously damage our ability to conduct research that strengthens our nation's security and economic competitiveness," Allen said. "It would make it harder for us to make a world-class college education affordable for all families, too."

To be sure, money is fungible, and colleges with large budgets have flexibility to choose which expenses to prioritize. But Levine's research, published by The Brookings Institution, suggests that institutions with large endowments do spend more money per student on academics and student services and offer more financial aid to lower- and middle-income students.

Republicans who have proposed endowment taxes argue that the schools are taking advantage of public money and hoarding wealth by claiming tax-exempt status while charging high tuition. There might be merit to a policy that moderately taxes the wealthiest endowments and dedicates the money to federal financial aid. But this proposal isn't it.

It's hard not to see the proposal as punitive, aimed at harming the Ivy League institutions that GOP lawmakers love to hate instead of solving a problem. If there were any example of the naked politics behind it, one only has to look at a proposed new tax exemption for religious colleges — a carveout that could save the University of Notre Dame from paying the endowment tax.

The proposed formula also bases its calculations on the number of domestic students attending a school, while the previous formula counted domestic and international students. This appears to be part of an attempt by some Republicans to convince schools to accept more American students. It would disadvantage schools like Columbia and Cornell universities, which have large student populations, including many international students. Today, some schools rely on international students who pay full tuition to offset the financial aid given to Americans.

Trump has already cut or threatened to cut billions of dollars from elite schools, including Harvard, citing antisemitism as well as racial discrimination and leftist bias in academia. But there are ways to address these legitimate problems that would reform rather than dismantle the world-class educational institutions that the president and his congressional allies seem hellbent on destroying.

An editorial from The Boston Globe.