On page 422 of the 429-page plan by House Republicans to overhaul US federal taxes, there is a somewhat strange proposal.
It calls for a 1.4% tax on the investment income of private colleges and universities. But the tax would only affect institutions with at least 500 students and where the value of the school’s endowment is more than $250,000 per student. Bloomberg estimates that the new tax would only affect 70 institutions. The Senate’s version of the plan also includes the provision (on page 162 of 247).
Daniel Hemel, a University of Chicago law professor who studies taxation, sees this as almost entirely political. “The Republicans have been pissed off about university endowments for a while, and this seems to me an attack on what they see as bastions of elitism,” he says. “But it raises virtually no money. It’s just enough to get places like Harvard and Yale angry, but not enough to generate much revenue.”
The Joint Committee on Taxation estimates that the tax would generate just $250 million per year (pdf)—around 0.007% of the $3.3 trillion in revenue collected in 2016. Harvard, Yale, Stanford, and Princeton, which all have endowments worth more than $20 billion, would pay the most. For example, Harvard would have had to pay nearly $20 million on the $1.4 billion it generated from investments in fiscal year 2017. Liberal arts colleges with large per-student endowments, like Amherst and Grinnell, would also see a sizable financial hit.
In recent years, university endowments have boomed. From 2001 to 2016, the 10 biggest endowments collectively grew by about 80%, from $106 billion to more than $180 billion. At the same time, tuition costs at these institutions continued to rise. Republicans legislators have taken notice. Senator Chuck Grassley, a Republican from Iowa, has suggested that schools with large endowments are “hoarding assets at taxpayer expense,” and perhaps they should be required to spend at least 5% of their endowments every year.
Universities argue that the tax will just make schools more expensive for students. Administrators at Yale and Princeton claim they spend large portions of their investment income on financial aid, and that the tax plan is simply a money grab by Congress. The American Council on Education, an advocacy group for higher education, also opposes the legislation. “This is about raising revenue, really on the backs of students,” Steven Bloom, a spokesman for the organization, told Politico.
Whatever the merits of the tax, it is mostly a waste of time. The financial implications for the government are tiny—it would pay for less than 0.2% of the proposed corporate tax cut—and the size of the tax is too small to make a significant difference on the behavior of affected universities. What the proposal mainly accomplishes for Republicans is to make an enemy of higher education.