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Taxing College Endowment Income No Way to Pay for Regressive Tax Cuts

The House- and Senate-passed Republican tax bills each impose a 1.4 percent excise tax on the income from endowments of some private colleges and universities. The idea appears to stem from a larger proposal, as explained below, to boost educational opportunities for low- and moderate-income students. Congressional Republicans, however, are using the tax to help pay for tax cuts that mainly benefit wealthy households and profitable corporations, while dropping the rest of the education proposal.

In a 2016 House Ways and Means Committee hearing, Mark Schneider, an American Institutes for Research Vice President and Institute Fellow, called for a similarly structured tax on college endowment incomes. But to keep the tax from hitting the funds that schools use to provide financial aid — which would make it harder for lower- and middle-income students to attend college — Schneider recommended offsetting each school's tax liability by the amount it devotes to financial aid for students who qualify for Pell Grants. He also recommended that federal policymakers use the revenue to improve community college affordability, as those schools’ students often lack access to the same resources as other students, and the schools themselves have smaller pools of financial aid available for students.

Whatever one may think of the Schneider proposal, the provision in the House and Senate tax bills is much different. Both bills would impose a tax on private endowments of a certain size, regardless of how much the schools spend on financial aid or any other measure of access and affordability. The House proposal applies to schools whose endowments exceed $250,000 per student, which would affect 66 schools, according to the think tank New America; the Senate raised the threshold to $500,000 per student, reducing the number of affected schools to 30.

The House provision would generate an estimated $2.5 billion in revenue over ten years; the Senate’s would generate $1.8 billion. Neither bill would direct those funds toward making college more affordable to community college students, using them instead to help finance tax cuts that would overwhelmingly benefit high-income households and wealthy corporations.

Proponents have offered no rationale for this tax other than to raise revenue. The American Council on Education, on behalf of 46 other higher education groups, has warned that it would reduce endowment funds available for scholarships, as well as research and educational programs, at their schools.

Making higher education more broadly accessible and affordable — and ensuring that colleges and universities serve a wide range of students — should be a national priority, both because it reflects our values of helping everyone meet their full potential and because a better educated workforce is good for economic growth. Stanford economist Raj Chetty and others have raised valid criticisms about how much elite colleges and universities are using their large endowments to provide upward mobility to lower- and middle-income students. But taxing certain colleges’ endowments and using the savings to help pay for highly regressive tax cuts would hardly advance opportunity.