The US House of Representatives passed a tax reform bill on Thursday, May 22, which increases the tax rate on investment returns for the wealthiest elite universities’ endowments. Supporters believe this will help curb the proliferation of “woke” ideology in higher education institutions, but critics argue that it will ultimately harm disadvantaged students.
According to the tax and spending bill proposed by Trump and passed by the US House of Representatives on Thursday, one proposal is to raise the tax rate paid on investment returns of certain university endowments from 1.4% to a maximum of 21%, affecting some of the top private universities in the United States.
For a long time, conservative individuals in the US have criticized these prestigious universities for being infiltrated by extreme leftist ideologies and becoming breeding grounds for anti-American and anti-Semitic movements. On Thursday, the Trump administration also revoked Harvard University’s qualifications to enroll foreign students, a move that the university has countered as illegal.
Jason Smith, a Republican congressman from Missouri and chairman of the House Fundraising Committee, stated shortly after the passage of the tax reform bill, “For too long, universities have enjoyed preferential treatment in our tax system, ignoring the interests of taxpayers.”
He released a statement pointing out that the new tax measures aim to “hold accountable those ‘woke’ elite universities that operate more like large corporations or other tax-exempt entities.”
These prestigious universities argue that most of the funds in the endowments are designated for specific projects as per the donors’ requests. Therefore, if universities are required to pay more taxes, they would not be able to compensate for this additional expense from the endowment, leading them to cut spending in other areas.
Luisa Rapport, a spokesperson for Stanford University, stated that the proposed increase in taxes “will directly reduce undergraduate scholarships, support for faculty and research, and funding for research projects.”
Kimberly Allen, a spokesperson for the Massachusetts Institute of Technology (MIT), stated that the proposal “equates to taxing national research and student aid, which for MIT alone would cut hundreds of millions of dollars from its budget annually.”
During President Trump’s first term, the current 1.4% tax rate applied to schools where the “per-student endowment” (total endowment divided by full-time student enrollment) exceeded $500,000.
According to data from the Internal Revenue Service (IRS), in 2023, a total of 56 private schools paid taxes at a 1.4% rate, with a total tax amount of approximately $380 million.
Under the new proposal, schools with a “per-student endowment” of $2 million or more would be taxed at a rate of 21%. Additionally, under the bill, international students are not counted in the denominator of student enrollment, meaning schools with a significant number of international students, including many elite universities, will face hefty taxes.
The proposed tax rates are as follows:
– Schools with a “per-student endowment” between $1.25 million and $2 million will be taxed at 14%.
– Schools with a “per-student endowment” between $750,000 and $1.25 million will be taxed at 7%.
– Schools with a “per-student endowment” between $500,000 and $750,000 will be taxed at 1.4%.
The American Council on Education (ACE), a higher education lobbying and advocacy organization with 1,600 members, has been consistently against the implementation of this tax provision. Steven Bloom, a tax and donation expert at the council, stated that the new proposal “inherits the terribly implemented tax policies of 2017, making them even more expensive and complex.”
Phillip Levine, an economics professor at Wellesley College, estimated that the new tax policy would result in top universities like Harvard, Yale, Stanford, MIT, and Princeton paying an additional $400 million to $850 million in taxes annually.
Levine pointed out that despite the high tuition fees at these Ivy League institutions, they are able to provide significant financial aid to students from low-income families through their large endowments. He stated, “These schools can offer quality education and admission opportunities to low-income students,” and the high tax rates would change this status quo.
Laura Wirick, managing partner at Meketa Investments, stated that if the proposed maximum tax rate of 21% is passed, it may discourage donations to elite schools because donors may feel that these funds “can be more effective in tax-exempt organizations.”
(Reference: Reuters)