Endowments Are Next
Forcing some of America’s richest and most successful enterprises to pay more in taxes would have once, for Republicans, been tantamount to treason. But when those enterprises are left-leaning universities, all bets are off.
As part of its attack against elite universities, the Trump administration has frozen billions of dollars in federal funding for Columbia and Harvard, and has announced a scheme to revoke Harvard’s nonprofit tax-exempt status. Now congressional Republicans are considering a move that would have even bigger long-term consequences for higher education: imposing a steep tax on university endowments.
Historically, nonprofit universities were exempt from federal taxation. As part of the 2017 tax cut, Congress imposed a levy on the annual investment income that the richest universities generate from their endowments, but it was set at a trivial 1.4 percent. This year, Republicans will very likely include an endowment-tax hike in their larger, must-pass reconciliation bill, for which they don’t need any Democratic votes. A 14 percent tax—in the middle range of the proposals—would cost Harvard, for example, about $560 million a year, according to an analysis by Phillip Levine, an economist at Wellesley College. A 21 percent tax, matching the corporate rate, would raise that figure to about $850 million. Unlike Donald Trump’s legally dubious executive orders, an endowment-tax hike is something that no judge would be likely to overturn.
Taxing the fattest university endowments has long been championed by the political left as a way to get the likes of Harvard and Yale to share their obscene wealth in the name of fairness. (“Tax Ivy League Endowments, and Fund Public Higher Ed,” read one headline in the socialist magazine Jacobin.) But in recent years, the idea has made the leap to the MAGA right. Along the way, it has become something very different: not a tool to more equitably distribute educational resources but a weapon to make elite higher education poorer, weaker, and less influential.
You do not have to view the Ivy League as a hotbed of Marxism to have reservations about schools with billions of dollars in the bank getting a huge annual subsidy from the government. About half of all endowment assets are held by just 20 institutions—less than 1 percent of American universities. The five largest private-university endowments have each increased about tenfold over the past four decades, even after accounting for inflation. The number of students these universities enroll, however, has stayed about the same—meaning the share of the population they educate has decreased. The richest universities use their endowments to offer generous financial aid to students who can’t pay full price. But that is possible only because they mostly enroll rich kids. (And as these universities amass fantastic wealth and serve a tiny fraction of the population, they trumpet the values of equity and inclusion.)
[Lee C. Bollinger: Universities deserve special standing]
Accordingly, progressive Democrats in Massachusetts—the home of a dozen members of the billion-plus club, most notably Harvard ($53.2 billion) and MIT ($24.6 billion)—have been trying since 2008 to institute an endowment tax at the state level. The state legislature is currently considering a long-shot bill that would levy a 2.5 percent tax on the total value of any endowment greater than $1 billion. The revenue would go into a fund to subsidize education costs for low- and middle-income students in the state. Democratic legislators in Connecticut are weighing a bill that would allow municipalities to establish their own endowment taxes on local universities. And New York lawmakers spent years trying unsuccessfully to pass legislation to force Columbia and NYU, two of Manhattan’s biggest landowners, to pay property taxes that would be used to fund the state’s public colleges.
The right-wing version of the endowment-tax idea looks a little different. Republican lawmakers generally do not propose to use the tax revenue derived from Stanford and Princeton to prop up the public-education system. They argue, in essence, that universities have become so left-leaning and divorced from traditional educational principles that they no longer deserve a public subsidy. The point is punishment, not redistribution.
Senator Tom Cotton recently introduced a stunt bill, the Woke Endowment Security Tax Act, that would impose a onetime 6 percent excise tax on 11 specific universities. (The revenue, according to Cotton’s office, would be used “to pay down the national debt and to secure the southern border.”) J. D. Vance has argued that a high tax would force universities to rein in “DEI and woke insanity.”
Some Republican legislators are gesturing at a kind of redistributive logic. Representative Dave Joyce, for example, who introduced a bill to raise the tax rate to 10 percent of endowment income and lower the threshold to universities with $250,000 worth of endowment assets per student, has said that his proposal encourages universities “to commit a larger share of their endowment spending to financial aid for students,” because spending down the endowment could get them under the tax threshold.
In fact, the available evidence suggests that taxing university endowments does not, on its own, solve any of higher education’s affordability or exclusivity problems. Several studies have analyzed the consequences of the 2017 tax, which has claimed 1.4 percent of the annual investment income for private universities with at least 500 paying students and endowment assets that exceed $500,000 per student. (That dollar amount is not pegged to inflation. In 2021, 33 universities qualified. By 2023, the number had grown to 56.) Most affected institutions aren’t close enough to the threshold to get out of the tax, so when their endowment gets taxed, they simply have less money to give out and no new incentive to increase financial-aid offerings. (About half of the spending from endowment revenue goes to financial aid.)
Indeed, according to one study, most schools didn’t make any detectable policy changes in response to the tax. A handful might have expanded enrollment to get below the endowment-value-per-student threshold—a positive result—but they appear to be outweighed by institutions that instead raised tuition and cut aid. CJ Ryan, a law professor at Indiana University who co-authored one of the studies, expects the latter type of behavior to become more prevalent if the tax rate increases. “What the universities that we analyzed are doing is sort of passing the cost of the tax onto students and their families,” Ryan told me. “If the goal is to make the cost of higher education lower, this does the opposite of that.”
Raising the tax would also restrict resources for scientific research, an area already much diminished by the Trump administration. Universities use 15 to 20 percent of annual endowment returns, on average, to support research and academic programs.
The very wealthiest universities, such as Harvard and Yale, can probably weather the effects of an endowment tax without too much damage to their core mission. But even they don’t have as much flexibility as you might think. A large portion of every university’s endowment income can be spent only on certain purposes specified by donors—such as, say, a building with their name on it. That money can’t be redirected to pay for financial aid, research budgets, or professors’ salaries.
A higher endowment tax would be especially painful for smaller institutions. “If the target is Harvard, it’s going to bounce off the target and hit somebody else,” Christopher Marsicano, an educational-studies professor at Davidson College who co-authored the study with Ryan, told me. “It is not a stretch of the imagination to believe that whole communities will now lose hospitals or lose access to employers or employment.” Grinnell College, in Iowa, relies on endowment revenue for 60 percent of its annual budget, President Anne Harris told me. The school would likely have to make painful cuts in order to keep up its policy of need-blind admissions. Wesleyan University President Michael Roth told me that a higher tax rate would “undermine our financial aid program in a very serious way.”
People like Harris and Roth are not disinterested parties; of course a university president thinks that taxing universities would be devastating. The more telling fact is that the policy’s right-wing supporters seem to agree.
Christopher Rufo, the conservative activist who has been the intellectual force behind the Trump administration’s attack on higher education, has said that wrecking university finances is the point. “I think that putting the universities into contraction, into a recession, into declining budgets, into a greater competitive-market pressure, would discipline them in a way that you could not get through administrative oversight with 150 extra Department of Ed bureaucrats,” Rufo told The New York Times. The administration has already tried to use federal funding to force universities to align with its political priorities and to punish them if they refuse. Raising taxes on universities would further weaken their standing.
[Graeme Wood: What happens when a carnival barker writes intellectual history]
The naked destructiveness of the current endowment-tax proposals has turned off many on the left who, in principle, would have supported raising taxes on wealthy institutions. Phil Hackney, a tax-law professor at the University of Pittsburgh, has spent years criticizing how tax exemptions can privilege rich individuals and institutions over everyone else. But given the administration’s all-out assault on higher education, he’s against the efforts to raise taxes on universities. “It’s a terrible choice to use public policy to attack your enemies,” he told me. “My deep concern is that this is going to irreparably damage these institutions in a way that we will live to regret.”
But when damaging universities is the point, that argument is unlikely to prevail.