US universities fear wider application of new endowment tax

Elite institutions making last-ditch bid to block multimillion-dollar levy

May 4, 2019
Harvard University
Source: iStock

Harvard University and other elite US institutions are making last-minute bids to avoid tens of millions of dollars in new taxes on their endowments that reflect bipartisan frustration with their accumulations of wealth.

The presidents of six top universities in Massachusetts – among them Lawrence Bacow of Harvard, whose endowment, at nearly $40 billion (£31 billion), is the world's largest – jointly wrote to Congress to urge a reversal of the new federal tax and its “damaging” precedent.

“The impact of this pernicious tax will grow significantly over time” and harm the ability of the universities to serve their neediest students, the presidents wrote.

Attacks on wealthy universities in the US are more recently associated with Republicans. But denigrating academic elites has a long history that does not neatly fit traditional party lines, and even institutions beyond the couple dozen or so directly affected by the new tax fear its future pathways.

“There’s always a chance that in the near or medium-term future it may apply to us,” said Mark Schlissel, president of the University of Michigan at Ann Arbor. “So it is something that we think about and stay on top of, and discuss a lot when university leaders get together.”

The new tax – 1.4 per cent on endowment returns at private institutions with endowments greater than $500,000 per student – was approved by the Republican-led Congress in 2017 with the Trump administration’s backing.

Affected universities are expected to face their first payments under the endowment-related terms later this year.

For Harvard and Yale universities, the institutions with the two biggest endowments, the tax would cost about $30 million to $40 million a year.

Dr Bacow, joined by the leaders of the Massachusetts Institute of Technology and Amherst, Smith, Wellesley and Williams colleges, sent their appeal to Richard Neal, a Democrat from Massachusetts who heads the tax-writing House Ways and Means Committee.

The overall 2017 tax bill favouring the richest Americans was a Republican effort. But its raiding of wealthier colleges has encountered some Democratic support and unclear levels of Democratic willingness to fight back.

Last year’s Democratic nominee for the Massachusetts governorship, Jay Gonzalez, proposed a 1.6 per cent tax on non-profit private colleges with billion-dollar endowments. Even the city of Cambridge, with Democratic voters in the majority, has previously considered endowment taxes on Harvard and MIT.

Despite his powerful new position in Congress, Mr Neal has warned that the tax might be tough to reverse.

After years of fighting, Harvard and other elite US universities should prepare to pay the tax, said Paul Streckfus, the editor of the EO Tax Journal website, which tracks tax-exempt organisations.

“Most of the colleges and universities that will be affected have the resources to consider these new taxes on endowments and salaries just [another] cost of doing business,” Mr Streckfus said.

But Mr Streckfus agreed with Professor Schlissel about the potential danger for all of higher education from the precedent, even if the wider academic world still is not protesting very loudly.

Demonising donors behind Michigan’s $12 billion endowment was deeply misguided and failed to understand the egalitarian ideals of a college endowment, Professor Schlissel said.

“Society has gotten away from this idea that it’s in everyone’s common interest to chip in for the common good,” he said. “It’s all of society that benefits when someone gets educated up to their level of capacity.”

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