New Endowment Tax Could Impact Over 50 Universities, Including Small Colleges

McPherson College Drawn Into Endowment Tax Debate Amid Legislative Push

The debate over university endowments has resurfaced with a new Republican proposal aimed at imposing significant taxes on private colleges and universities with large financial reserves. While the plan primarily targets Ivy League institutions, it has unexpectedly drawn attention to McPherson College, a small school in rural Kansas known for its classic car restoration degree. Despite admitting the majority of its applicants, many from nearby communities, McPherson College may be affected due to its $1.6 billion endowment, received through an anonymous donation a few years ago. According to a recent report from Republicans on the House Ways and Means Committee, the proposal aims to hold accountable what they describe as “woke, elite universities that operate more like major corporations”. The plan includes imposing billions in taxes on the investment returns of several dozen private colleges and universities, potentially impacting institutions beyond the Ivy League.

A New York Times analysis found that at least 58 institutions could be affected by the proposed endowment tax, based on their endowment sizes and student enrollment. The list includes major universities like Harvard and MIT, as well as smaller colleges such as Berry College and DePauw University. The idea of taxing endowments dates back to Donald Trump’s first term, when a 1.4 per cent tax was introduced. Efforts to expand it reportedly gained traction in 2023 after former Senator J.D. Vance proposed a 35 per cent levy on endowments over $10 billion.

As part of his second-term agenda, President Trump has prioritised taxing wealthy private universities, claiming they are “plagued by antisemitism”. His proposed “big, beautiful bill” introduces a tiered tax system based on endowment size and student population, with a top rate of 21% for institutions holding at least $2 million per student. This tax would impact nine universities, including Harvard, Yale, and Princeton, potentially costing them hundreds of millions annually. Phillip Levine, an economics professor at Wellesley College, estimates Harvard could face $850 million in taxes, Yale $690 million, and Princeton $586 million. Supporters argue the measure aims to curb elite institutions’ tax advantages, which they claim have been misused. Republican lawmakers argue the tax aims to curb elite institutions’ misuse of tax benefits, but analysts suggest its impact extends beyond Ivy League schools to smaller colleges like McPherson College, which could face a 7% tax rate, costing nearly $8 million annually.

A New York Times analysis indicates that while the tax is based on endowment-per-student ratios, some institutions, such as the University of Southern California, may be exempt due to high enrollment numbers. However, Columbia University, initially unlikely to qualify, is now included after lawmakers excluded international students from enrolment figures, potentially owing $79 million annually under the revised bill. The proposed tax is expected to expand beyond endowments to include other university investment income, such as royalties. The 1.4% endowment tax, introduced during Trump’s first term, affected 56 schools in 2023, according to IRS data. Supporters argue that wealthy universities should better utilise their tax-advantaged endowments. President Trump has claimed the tax revenue would fund a free virtual university, the American Academy, though no concrete plans have been announced. For now, any collected revenue would go into the government’s general fund.

Universities have strongly opposed the proposed tax, arguing that endowments fund significant financial aid for low- and middle-income students. The National Association of College and University Business Officers reported that nearly half of the $30 billion spent from endowments in 2024 supported student financial aid. Critics warn the tax could limit access to education. Princeton University President Christopher L. Eisgruber noted that 71% of freshmen receive no-loan financial aid from the university’s endowment, averaging $73,000 per student. Similarly, Williams College President Maud S. Mandel stated that her institution spent $92 million from its endowment to support over half its student body, cautioning that the tax would directly impact this assistance.

Jonathan B. Williams, vice president at Pomona College, stated that the proposed tax could cost the school $40 million annually, equivalent to 460 full scholarships. Steven M. Bloom, assistant vice president at the American Council on Education, described it as a “scholarship tax”, warning it could hinder equitable access to higher education. Critics argue the tax may shift financial burdens onto families, potentially raising tuition costs by limiting institutions' ability to provide financial aid. In response, several universities have engaged lobbyists to oppose the legislation. Williams College has reportedly joined other institutions in hiring a lobbying firm, while DePauw University is collaborating with small colleges to highlight the tax’s adverse effects.

Medical institutions have voiced concerns over the tax proposal, with Lori Williams, vice president of communications at Baylor College of Medicine, suggesting that the inclusion of independent medical schools may have been unintentional. She stated that the institution is in communication with legislators to address the issue. Lawmakers have drafted a religious exemption, but it excludes schools founded before 4 July 1776, affecting Ivy League universities established by religious organisations before the United States was formed. David A. Super, a professor at Georgetown University Law Centre, warned that the cutoff date could lead to religious discrimination, as different faiths founded educational institutions at varying historical periods. Strict adherence to these policies will determine the future of university funding and accessibility.

Editor's Note:

The debate surrounding university endowment taxation has intensified, raising critical questions about the balance between institutional wealth and equitable access to education. While proponents argue that taxing large endowments could generate revenue and curb financial disparities, critics warn that such measures might compromise financial aid for low- and middle-income students. The proposal's expanded scope, affecting both elite and smaller institutions, further underscores the complexity of its potential consequences. As lawmakers deliberate on the implications, colleges and universities are actively advocating for exemptions, highlighting the role endowments play in academic funding and student support. 

Skoobuzz believes that the evolving discussions will undoubtedly shape the future of higher education policy, determining how institutions navigate financial sustainability while maintaining their core mission of fostering learning and opportunity.