Schmalbeck, Taxing Endowment

In the so-called “One Big Beautiful Bill Act,” Congress included several amendments to the Internal Revenue Code, including a provision that reduced the scope of an existing tax on income from college and university endowments, but more importantly greatly increased the tax rate on the small number of institutions that continued to be subject to the tax. Effective in 2026, this will be a significant tax on a few large universities holding very large endowments.

This article begins by analyzing the provisions of the tax, with particular attention to the amendments.The article concludes that the tax suffers from many design failures and contains several unjustified distinctions among colleges and universities.

The article then examines why colleges and universities maintain and seek to augment their endowments, both descriptively (that is, what motivates this?) and normatively (are the motivations consistent with good public policy?).

Finally, the article examines some alternative approaches to taxing endowments, if indeed they are determined to be excessive.