Update: The tax bill includes a tax on institutions with endowments larger than $500,000 per student. The grad student tuition waiver tax is not present. Student loan interest deduction still present as well.
As the GOP tax bills passed by the House and Senate coalesce into one, destined for President Trump’s desk, the highest echelon of the academic community is prepared for a broadside on their endowments.
Though it is still unclear what the final terms will look like, the legislation would impose a 1.4% tax on investment earned by private colleges that have endowments of over $500,000 or more per student. Thirty-two institutions stand to be affected – including many colleges from the Ivy League and NESCAC in the North East, and other blue chip universities around the country. The colleges say this will decrease access for lower-income students as endowments have enormous earmarked funds for financial aid.
Institutions have been hesitant to speak out about the bill for fear of putting a target on their back in the form of a tweet from the president himself. But it is widely suspected that the legislation was put forth by certain members of Congress as punishment for perceived political bias in higher education.
Instead of venting in the public square, universities are hard at work focusing efforts via government relations officials, leveraging alumni who might have influence — especially in Congress. So far, the bill has changed at least five times.
Harvard University’s $38 billion endowment is in the crosshairs of the GOP tax bill. (AP Photo/Elise Amendola, File)
Officials from affected universities have spoken out in muted terms. Cornell’s president, Martha Pollack, summed up the consensus in a recent interview in which she stressed that the proposal would “hurt higher ed without any clear policy purpose.” Pollack also questioned whether this hypothetical — she is careful to say — punishment would affect any change.
In the colleges’ view, the move would yield lots of downside for little upside. The tax on endowments would contribute to offsetting the $1.5 trillion cost of the Tax Cuts and Jobs Act, but by a negligible amount, as the tax would raise around $3 billion (0.2% of the $1.5 trillion). And since large portions of many endowments are restricted for financial aid, money for the tax bill would be money not going to financial aid, hurting affordability.
Universities have also pointed out that the measure would repurpose donations intended for financial aid to paying down the debt of the federal government, something that could discourage donations.
Revenge and a slippery slope, colleges say
Across the board, universities are privately condemning the bill as a punitive measure. One official for an institution that stands to be affected told Yahoo Finance that it’s widely understood that this is punishment by certain Republican lawmakers who have it in for higher ed for political reasons. The official, like others consulted for this article, spoke on the condition of anonymity to avoid public controversy that has plagued many university leaders this year.
Generally speaking, the academic community skews Democrat and liberal rather than Republican and conservative, and the political right has censured student movements.
“It’s mean-spirited,” Karin Johns, tax director for the National Association of Independent Colleges and Universities, told Yahoo Finance. “Congress views our sector as universally liberal, elite, and not doing enough to help students. None of which is true. They feel we align with a certain political mindset and they’re going to punish us for that.”
One college official told Yahoo Finance that it’s not even about the money per se, but the principle of taxing nonprofits by the federal government. Johns echoed that official point, noting that it’s a slippery slope: “What’s next? Churches? Soup kitchens?”
Johns noted that this proposal did not come from any lobbyist, but rather leaders of the Ways and Means Committee.
High executive pay and affordability in play
Of all lawmakers, Rep. Tom Reed (R-NY) has arguably pushed the hardest for the provision, having worked on similar legislation over the years.
Nora Retana, a spokesperson for Reed, said she had heard the punishment argument and rejected it.
“It’s absolutely not a punishment. Reed has made a comprehensive push for college cost reform and that’s ultimately his goal,” said Retana. She admitted that this specific bill didn’t address college cost, but said that it’s more about challenging the tax-exempt label of wealthy colleges that pay millions to executives and outside fund managers. President James Wagner of Emory, for example, makes $3.5 million a year.
“They’re tax-exempt but paying presidents millions,” said Retana, who also noted that the endowment managers take in enormous salaries. “If you want to operate as a business, be a business. This is not not about all endowments, it’s about reining in ones that take advantage of that.”
An official from a college affected by this legislation dismissed this in an interview with Yahoo Finance, noting that an enormous complex institution like a university pays its leaders based on industry benchmarks. They also noted that high-cost investment management pays for itself and that low-cost options would mean smaller returns. The official also noted that the schools affected have some of the most generous financial aid in the academic community.
Reed says endowments should be put more towards education, but the schools say that’s already their main purpose. Many Ivy League schools and other prestigious institutions like Harvard, Princeton, Yale, and Stanford don’t expect students from families making less than $65,000 to pay anything.
American competitiveness may be at stake
In a recent article in the Harvard Gazette, President Drew Faust noted that the tax’s impact on financial aid would “weaken the nation’s strongest contributors to medical cures, economic innovation, job creation, scholarship, and access to higher education for students of all economic backgrounds who will shape our future.”
The American worker’s competitiveness in specialized fields has been called to question as many companies have a hard time finding workers with the proper education. One measure of the tax bill in particular may make that even worse: the taxing of tuition waivers as income — another provision universities see as an attack on education.
Tuition waivers are like financial aid for graduate students, and should they be taxed as income, many students won’t be able to afford to pay their tax bills and may be forced to drop out. A growing number of GOP lawmakers, however, are opposing it, and an official at one school told Yahoo Finance it would likely be out of the final bill.
In a Politico op-ed, Yale trustee Douglas Warner III ‘68, a former chair of JP Morgan (JPM), expressed concern that competitiveness deficiencies could torpedo the goal of the tax bill. “It seems odd that a tax bill purporting to boost economic growth would take resources away from the institutions most vital to promoting it,” he wrote. “I know that the way out of the jobs dilemma in America is education and research. America’s global competitiveness depends on both.”
A workable alternative?
Democratic lawmakers and a handful of Republicans led by Sen. Lamar Smith of Texas — a Yale alum — are looking to kill this measure. But if a tax cannot be written out, universities are pushing for a tax credit that might offset it, earmarked specifically for financial aid. While it would still tax an institution unless the credit covered the entire tax bill, it would at least keep aid money going to students.
Even if the measures don’t pass, though, the academic community is concerned about a growing trend that seems to be devaluing higher education. These issues, one university official told Yahoo Finance, may not be going away. State governments, too, have shown an interest in the massive endowments. In 2016, Connecticut thought about taxing Yale’s endowment, prompting Florida Gov. Rick Scott to invite the university to move to the famously low-tax Sunshine State.
Schools that stand to be affected:
Baylor College of Medicine
Icahn School of Medicine
Medical College of Wisconsin
U of Chicago
U of Richmond
Washington and Lee