University endowments came under fire in the tax bill unveiled by Republican leaders in the U.S. House of Representatives on Thursday.
Tucked away in the 400-page plan to overhaul the nation’s tax code is a proposed 1.4 percent excise tax on endowment investment income, specifically targeting universities with endowments of over $100,000 per student. Yale, which boasts a ratio about 20 times that figure, would have had to pay around $25 million in fiscal year 2017 if such a provision had been in place. According to President of the Nexus Research and Policy Center Jorge Klor de Alva, the tax — aimed only at universities with 500 students or more — could affect close to 500 institutions.
“The fact that it’s showing up [in the bill] is very significant,” Klor de Alva said. “I suspect that something along the line is very likely to be passed.”
He added that a person familiar with the issue told him that the proposal is a very late addition and was not present in the tax bill just two days ago.
Gregory Huber, a political science professor at Yale, said the bill’s architects likely included the endowment tax at least in part to reduce the plan’s net cost and because Republicans in Congress tend not to come from districts home to universities affected by the provision.
But even if the tax receives congressional approval, Huber cautioned, its implementation could prove a challenge.
“One thing to note is that universities, like estate attorneys, are probably very good at structuring things financially so as to avoid paying these sorts of taxes,” Huber said. “What, for example, is the definition of ‘the endowment’? Similarly, how many students does Yale have, and can that be increased by a factor of 22 or so to get under the cap?”
Mark Schneider, vice president of the American Institutes for Research, said that, if passed, the bill could lead to “weird incentives,” dissuading universities from growing their endowments when they are just below the $100,000 per student bar.
This is not the first time lawmakers have contemplated partially withdrawing universities’ tax-exempt status. The Senate Committee on Finance discussed taxing university endowments in a 2007 hearing. Similar proposals emerged at the state level in Connecticut and Massachusetts but ultimately did not pass.
Schneider said the lobbying power of universities such as Yale is a major reason that similar proposals have fallen through in the past.
But with a Republican majority in both congressional committees tasked with creating tax plans — the House Committee on Ways and Means and the Senate Committee on Finance — the tax bill is likely to pass by the end of the year, Klor de Alva said.
“The point is that this is not a god given right [for universities] to be tax exempt,” Schneider said. “This is a result of congressional action, and it’s all done in the name of the public good. Everybody is very concerned about the degree to which these huge concentrations of wealth serve the public good any more.”
President Donald Trump said during a Tuesday meeting at the White House that he wanted to sign the bill by Christmas.
Jingyi Cui | jingyi.cui@yale.edu