Taxing endowments hurts universities
The Republican tax bills winding their way through Congress contain several provisions that would impair American higher education — from taxing graduate-student tuition waivers and tuition benefits for the children of employees to removing deductions for student-loan interest — but insufficient attention has been focused on the plan to tax university endowments.
This tax on endowment revenue will disrupt university education and research for decades and stems from a misguided understanding of how university endowments work.
This tax provision is in both the already-passed House GOP bill and the Senate GOP bill currently under consideration. With different thresholds, each would levy a 1.4 percent tax on the endowment income of scores or hundreds of universities. This threat of taxing endowments goes back several years, proposed to push universities to do more to lower tuition.
This is unfortunate. There are many problems with resource allocation in American higher education, with the challenges of affordability and access at the very top, but a simple tax on endowments does nothing to incentivize addressing them, and moreover, makes existing efforts even harder.
The problem is there is no such thing as a “university endowment.” Instead, endowed institutions each hold thousands of separate funds — Case Western Reserve, where I teach, has about 2,700 — each dedicated to specific purposes by the legal terms of donors. A fund gifted a century ago to purchase history books for the library or to support the salary of a professorship in pediatrics cannot be repurposed for student aid without a renegotiation of the gift’s terms — often impossible when donors are no longer alive — or, under extraordinary circumstances, consent from a judge. Universities, even the best endowed, cannot simply repurpose their collective endowment income to reduce tuition.
Instead, taxing endowment income means less money for each fund’s purposes. For a small library fund for philosophy books, this means forgoing a volume. But the $20 million for student aid loses hundreds of thousands of dollars, forcing the support of fewer students, less support per student, or both.
If Congress wants to encourage private institutions to use endowments to open doors to college, it could provide additional incentives for donors to make contributions dedicated specifically toward scholarships and tuition remission. It could incentivize prospective donors away from the already-wealthy institutions and toward those with smaller (or nonexistent) endowments.
Still, no student’s access to college should depend on personal wealth or private philanthropy. Only a small proportion of American college students attend elite institutions — ones whose resources make them best able to provide scholarships. Instead, most attend a range of public research, regional, and community college institutions. Since the early 1980s, state funding of higher education has stalled or dropped as student bodies have grown, forcing public schools to raise tuition to compensate. Either voters must demand their states better fund public institutions or the federal government must do so itself.
Americans are right to be frustrated with both ever-rising tuition and our unequal tax code. Taxing endowments makes both of these problems worse. Associate professor Case Western Reserve University Cleveland Columbus