The Endowment Tax and the Political Targeting of Universities

Even if you don’t study the intersection of tax policy and higher education like I do, it has become abundantly clear that universities—particularly elite, well-endowed institutions—are now firmly in the political crosshairs. Recent developments, including efforts to expand the endowment tax confirm what many of us have suspected: higher education is being positioned not just as a policy issue, but as a political battlefield.

This fight isn’t just about tax policy. It’s about the broader role of higher education in American society, the perception that universities have become ideological outposts, and the question of whether they deserve the tax privileges they currently enjoy. The efforts to expand the endowment tax signal that we are entering an era in which the halcyon days of tax exemption for higher education are over. Maybe that era came to an end in 2018, when the legislation known as the Tax Cuts and Jobs Act (TCJA) instituted the endowment tax on private universities with considerable endowment values. But renewed pushes to increase the tax rate and lower the statutory threshold for subjecting a broader group of universities to the endowment excise tax illustrate just how serious the situation is.

How Did We Get Here?

The 1.4% excise tax on net investment income of wealthy private university endowments was enacted as part of the 2017 TCJA, marking the first time Congress successfully imposed direct taxation on university endowments. At the time, it was framed as a modest levy affecting only the most well-resourced institutions—those with at least $500,000 in endowment assets per student. And it brought in a modest amount of revenue: about $380 million in 2023. But its “cliff effect”—subjecting all universities that pass this threshold—to the same percentage of excise tax reflects a rejection of the principles of vertical equity on which many taxes are based.

Now, Congress is pushing to expand the endowment tax. Lawmakers are proposing to:

• Increase the tax rate—some proposals suggest raising it to 21%, the same as the corporate tax rate;
• Expand the pool of affected universities by lowering the asset-per-student threshold;
• And implicitly use the tax as a pressure tactic—as seen in the case of Columbia University, which lost $400 million in federal funding over its handling of campus protests.

None of this is surprising. Elite universities have long been a populist target, and positioning them as tax-privileged institutions hoarding billions while students take on massive debt is a politically effective popular narrative. But if the endowment tax expansion is successful, it will hurt a range of institutions that are earnestly working to make higher education more affordable, especially to the students with greatest need. Last fiscal year, universities increased their endowment spending by about 6%, on average, with nearly half of this increase dedicated to student aid. Thus, the popular narrative just doesn’t hold up.

The Case against the Endowment Tax

To be clear, there is an argument that universities should contribute more to public coffers, particularly if they manage their endowments like investment funds. But simply put, an endowment is not the same thing as a giant investment fund. Rather, an endowment is essentially a trust; many endowments contain specific conditions as to their use, ranging from supporting faculty research to providing student financial aid. Thus, they are the lifeblood for a university’s operation. And taxing the returns they earn means that universities can provide less—not more—vital support for their faculty and students.

In fact, roughly half of endowment spending already goes toward student aid, and diverting money to taxes could limit access to higher education for low-income students. My recent research suggests that universities already affected by the endowment tax have been trimming student aid, among other things, to pay the current excise tax. If one purpose of the tax is to rein in the costs of higher education, the tax will only exacerbate these costs. Students, especially low-income students and their families, will pay the price.

Additionally, donations to universities may be negatively impacted—especially if donors know that a significant portion of their donation will be taxed. And if the tax discourages large donations, this would carry significant consequences that hurt universities far more than it increases tax revenue.

The modest revenue the tax brings in at its current rate is the equivalent of a rounding error compared to the trillions of dollars in tax cuts being debated in Congress. Increasing it to 21%, as some lawmakers have proposed, might raise $70 billion over a decade, but that sum is still minor relative to broader fiscal concerns.

But an increase in the tax rate would be an existential threat to universities on the cusp of paying the tax—or those just beyond the statutory threshold—because of the tax’s cliff effect. These institutions will be forced to make significant cuts to their operations in order to pay the tax. Unless Congress acts to revise the statutory thresholds more fairly, it’s entirely possible that universities in the very areas they represent will fold under the weight of the tax.

What’s Next?

For those of us in higher education, this should be a wake-up call. The financial model of higher education has always relied on its tax-privileged status, and that status is now under attack. While universities will undoubtedly fight these policies vigorously, they may struggle to win in the court of public opinion, where the perception of universities as elite, wealthy, insular, and ideologically one-sided remains potent. Maybe universities will have to accept a higher tax burden as the price of continued legitimacy. If that happens, the real question will be who pays the price—elite institutions, or the students they serve?

Christopher J. Ryan, Jr.

Indiana University Maurer School of Law