House panel advances bill to raise college endowment tax up to 21%

Dive Brief:

• House Republicans on the powerful Committee on Ways and Means advanced a sweeping bill Wednesday that would raise the excise tax the nation’s wealthiest private universities pay on their endowments by 15 times. 

• Private universities with $2 million in endowment funds per student would pay a 21% excise tax on their net investment income — the same rate for-profit corporations pay. Colleges subject to the excise tax with lower levels of endowment funds per student would pay less, with rates starting at the current level of 1.4%. 

• The proposal is part of a mammoth legislative package meant to fulfill President Donald Trump’s key policy priorities, including extending tax cuts enacted during his first term. However, the bill has to pass through the House’s slim Republican majority before it would have a shot at becoming law. 

Dive Insight: 

 Committee Republicans cast the proposal as holding accountable “woke, elite universities that operate more like major corporations.” Congressional Republicans have put wealthy and high-profile colleges in their crosshairs in recent years, frequently accusing them of failing to crack down on antisemitism and of stifling conservative voices. 

Under the bill, private colleges would face a four-tiered system for endowment taxes. Colleges with $500,000 to $749,999 endowment funds per student would continue to pay the current rate of 1.4%, with interim stops at 7% and 14% before the highest rate of 21% for the nation’s wealthiest universities. 

The richest private colleges already pay a 1.4% excise tax enacted by a Republican Congress during Trump’s first term. Only a few dozen colleges are subject to the tax, which applies to universities with at least 500 tuition-paying students and at least $500,000 endowment assets per student. 

However, higher education experts have warned that increasing endowment taxes would reshape private nonprofit colleges’ relationship with the federal government and undercut student aid and other activities their endowments support. 

In fiscal 2024, 48.1% of endowment spending went toward student financial aid, and 17.7% went toward academic programs and research, according to a February report from the National Association of College and University Business Officers and Commonfund. The rest went to other purposes such as faculty positions and facilities operations and maintenance.

Steven Bloom, assistant vice president of government relations at the American Council on Education, said ACE opposed the endowment tax when it was first enacted and that the new proposal makes “bad policy even worse.” 

“It’s always been a scholarship tax,” Bloom said, adding that it “will be incredibly detrimental” to efforts to provide student aid at impacted colleges.

The new proposal also would change which colleges are subject to the excise tax by exempting religious institutions. 

And while it would maintain the tax threshold of $500,000 in endowment funds per student, it would not include international or undocumented students in the calculation. That could newly subject colleges with sizable international populations to the endowment tax and bump others into higher tiers. 

A handful of colleges would likely pay the highest rate of 21% under the bill. 

Harvard, Yale, Stanford and Princeton universities, as well as the Massachusetts Institute of Technology, had endowment funds of over $2 million per full-time equivalent student in fiscal 2024, according to data from NACUBO and Commonfund. 

The Ways and Means’ sweeping tax bill now heads to the House Budget Committee, which plans to begin combining legislative proposals from across the chamber into one single package on Friday. 

The Budget Committee’s mark up will include proposals advanced last month by the House Committee on Education and Workforce, including caps on federal student loans, a reduction in Pell Grant eligibility and a plan to make colleges responsible for paying a portion of their students’ unpaid student loans. 

However, the House’s massive legislative package also needs Senate approval to become law. Sen. Ron Johnson, a Republican from Wisconsin, recently indicated he opposes the bill because it doesn’t reduce spending enough, Politico reported. The nonprofit Committee for a Responsible Federal Budget estimated Tuesday that the Ways and Means package would add $3.8 trillion to the federal deficit through 2034. 

Bloom noted that the first excise tax underwent large changes between proposal and enactment that effectively reduced the number of affected colleges. 

“Of course, we’d like to see the whole thing repealed, but that isn’t likely to happen,” Bloom said. “A good outcome would be to see no changes at all to the tax.”