FIX EXCLUSIVES
‘While some colleges will face a new financial burden from the tax, these schools are extremely wealthy and thus best equipped to handle the tax,’ economist predicts
A higher education economist recently explained to The College Fix how an expanded endowment tax on universities will affect higher education.
Some universities will pay more under the “One Big Beautiful Bill” budget reconciliation law passed this summer and now in effect. The law expands a tax on university endowments first implemented under the 2017 Tax Cuts and Jobs Act.
“Colleges subject to the tax are required to pay a certain percentage of their endowment income to the government (not a percentage of the value of the endowment itself, a common misconception),” economist Preston Cooper told The College Fix via email. “This percentage ranges from 1.4% to 8% depending on the size of the endowment.”
“The endowment tax expansion will raise about $761 million over the coming decade, according to the Congressional Budget Office, which offsets part of the cost of the tax cuts in the bill,” Cooper, a senior fellow with the American Enterprise Institute, told The Fix. Other estimates have suggested four universities alone could pay $1 billion in the first five years and put projected revenue at more than $10 billion. The differences could be due to assumptions about market growth or decline, Cooper told The Fix.
“The endowment tax reduces the cost of the bill very slightly, so it will not add quite so much to the national debt,” he said. “While some colleges will face a new financial burden from the tax, these schools are extremely wealthy and thus best equipped to handle the tax.”
Cooper also said the revenue, in his opinion, should have been “set aside for specific purposes, such as funding scholarships or workforce education.”
The new bill, along with other federal spending changes, is already having effects.
Yale University President Maurie McInnis said the school “will pay an estimated $280 million in the first year it is in effect, and likely more in subsequent years.”
President McInnis cited the Trump administration’s proposed cuts to federally-funded entities as another area of concern. These issues led the university, according to a campus statement, to implement a 90-day hiring pause and a “5% reduction in non-salary annual budgets.”
The university has not responded to emails and phone calls in the past several weeks asking for further comment on the tax.
The Association of American Universities shared with The Fix a letter it sent to the Senate opposing the endowment tax expansion. “AAU opposes this extreme expansion of the tax, because it will reduce the funds that these institutions would otherwise have available to devote to supporting institutional aid for students as well as scientific research,” the letter states.
Indiana University law Professor C.J. Ryan provided The Fix with his past commentaries on the proposals when asked for comment. Ryan studies nonprofit law and student loan policy and has written about endowment taxes.
In a co-authored article, Professor Ryan and Professor Christopher Marsicano warned that the tax could unintentionally harm small colleges: “Instead of burdening rich and famous colleges, the tax would wind up costing the low- and middle-income students at small schools with far less familiar names and a lot less money,” the pair wrote.
Marsicano is an educational studies professor at Davidson College and regularly researches public policy issues relating to education.
“While Harvard, Columbia, the University of Pennsylvania and others with big names and even bigger endowments would undoubtedly be hit by the tax hike, so too would small colleges in reliably red states,” they wrote.
In another post at a blog for law professors, Ryan estimated about 25 universities will pay the tax. He predicted “at least 14 universities will stay in the 1.4% tranche, 14 universities will see their endowment tax liability increase 5x (7%), 10 universities get hit with a 10x endowment tax increase (14%), and 3 universities will see their endowment tax liability increase 15x (21%)—if the bill is enacted as it stands.”
“At the highest rate, this is essentially a corporate tax on nonprofit entities,” he wrote.
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IMAGE CAPTION AND CREDIT: President Donald Trump signs a bill; White House/Flickr
