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Richest U.S. Colleges Would See Relief Under Democrats’ Tax Plan

Bloomberg logoBloomberg 9/11/2021 Janet Lorin
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(Bloomberg) -- A tax on the richest private U.S. college endowments would be curtailed under a plan by House Democrats, provided the schools address tuition costs.

The provision would reduce the tax through a calculation that weighs revenues from undergraduate tuition and fees against undergraduate financial aid, according to Liz Clark, a vice president at the National Association of College and University Business Officers.

The language is included in the text of a bill released late Friday by the House Ways and Means Committee, which will resume debate on its portion of President Joe Biden’s $3.5 trillion economic agenda next week.

The Trump-era levy, passed in 2017 to help fund corporate tax cuts, has been reviled by the affected colleges, which have lobbied for years to have the provision removed. A group of higher-education trade groups asked for the tax to be repealed in a letter in June.  

The tax is “is unprecedented and damaging to the teaching and research mission of the affected institutions,” Ted Mitchell, president of the American Council on Education, wrote to leaders of the House Ways and Means and Senate Finance committees. “This tax takes money directly away from teaching, research, student financial aid and support services, and countless other mission-focused activities.”  

The 1.4% tax on investment earnings affected roughly three dozen private colleges with endowments of at least $500,000 per student, including major research universities like Harvard and Princeton as well as small liberal-arts colleges such as Williams and Amherst.

Colleges enjoy many tax benefits. Before the 2017 levy, their endowments could grow tax-free using the most sophisticated investment vehicles, such as private equity, venture capital and hedge funds. Donors to schools also get deductions.

With the pace of college tuition exceeding inflation for decades, members of Congress have questioned why the richest schools don’t spend more.

Awkward Timing

The Democrats’ proposal comes at an awkward time as colleges prepare to announce their investment returns over the coming months. 

Endowments saw blockbuster performance for fiscal 2021, returning a median 27% for the 12 months ended June 30, the strongest since 1986, according to data from Wilshire Trust Universe Comparison Service. Funds over $500 million did better, a median gain of 34%.

Read more: Harvard, Yale to Decline Federal Stimulus Money for Covid Costs

Some of the richest colleges, including Yale and Harvard, rejected their allocation of federal stimulus money, despite expenses from the pandemic such as testing and reduced revenue from dorms and dining services with fewer students on campus last year.

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