Proposed Amendment to University Endowment Tax

My co-blogger Daryll Jones already shared the news that the Ways and Means Committee reported to the House H.R. 8913, which is an amendment to IRC 4968(b), the tax on the endowments of the largest American universities. The endowment tax is modest in size (1.4% of “net investment income”), and only applies to schools with endowments of more than $500,000 per student (according to the chart previously posted, only 23 schools total). The amendment changes the calculation of which schools are subject to the tax by only counting students who are U.S. citizens or permanent residents in the numerator of the calculation, excluding any students in the U.S. on a student visa. In other words, under current law, a school with a $500 million endowment with 1,001 students (here permanently or temporarily) would not be subject to the tax. If the amendment passes, the school would need 1,001 U.S. citizen or permanent resident students to avoid the tax. The effect of the amendment, presumably, is to expand the number of schools subject to the tax, and the JCT estimates that the revenue from the amendment would be $26 million in 2027, the first full year of its effect. Obviously, schools could expand their student body to avoid the tax, just like they can now, but under the proposed change they would need to increase the number of U.S. citizen and permanent resident students, not the number of temporary residents.

Unlike many of my colleagues in the nonprofit-o-sphere, I’m a fan of taxing large endowments, since I think it’s generally fair to tax major accumulations of investment income to spread the burden of taxation more broadly, whether those accumulations are held by individuals, corporations, or charities. I wish we would do it more consistently. So, in theory I would support an amendment that increased the number of schools subject to the tax (not that I get a vote on it). But it seems perverse to link this expansion to two symbolic meaning of the amendment: hostility to universities and hostility to foreign students. Given that I’ve devoted my professional life to educating students in universities, it shouldn’t be surprising that I think they are a force for profound good in American society. And given how many students I have educated from around the world, here on student visas, it should be unsurprising that I feel strongly that America’s role as the world’s greatest university system is a profound benefit both to the country and the world. So, I’m a university booster for sure. But that doesn’t mean that universities with very large endowments shouldn’t pay some modest tax on their investment income to share the burden of the cost of running this country of ours. Sometimes the (intended!) symbolic meaning of a tax rule gets in the way of what might otherwise be good policy.

–Benjamin Leff