“An Unprecedented and Damaging Tax”

Endowment funds are made up of various financial investments and assets that are donated to academic institutions in order to fund education, financial aid, and research. Some of these donations can be massive — in 2016, for example, Nike cofounder and billionaire Philip Knight donated $400 million to Stanford University. Many of these funds are invested in private equity and venture capital firms, giving wealthy institutions billions back in returns.

The total endowment market value nationwide stands at $839 billion, according to a 2023 study of endowments by the National Association of College and University Business Officers lobbying group. Almost 60 percent of this money comes from universities with endowments of over $5 billion, even though these twenty-nine schools only make up only 4 percent of those surveyed.

Supporters of large university endowments say they’re not massive slush funds that can be taxed freely. This is because they are made up of a diverse range of gift agreements that fund everything from scholarships to faculty positions to scientific research. They also claim that an endowment tax is unconstitutional because it is “an attack on academic freedom” that targets certain colleges and universities.

Others say that no matter the specifics of their vast wealth, academic institutions need to pay their fair share.

For most of their history, the vast majority of private US colleges were exempt from federal and state taxes because of their nonprofit status as an educational institution. This exemption includes local taxes, straining institutions’ relationships with surrounding towns and cities. For example, Yale University in New Haven, Connecticut, receives a multimillion dollar tax break, even as New Haven’s distressed municipality struggles to support residents with a poverty rate twice the national average.

But the status quo began to shift in 2017. That’s when President Donald Trump passed the Tax Cuts and Jobs Act, which required universities with endowment assets exceeding $500,000 per student to pay a 1.4 percent tax on their endowment earnings.

As a result, Harvard, which boasts the world’s largest endowment of $50.7 billion, faced a $37.7 million tax bill in fiscal year 2019. Stanford University, which has an endowment of $36.5 billion, faced a similarly hefty bill.

Schools aren’t accepting their new tax bills without a fight. Harvard, Stanford, and other schools argue that the endowment tax imposes “an unprecedented and damaging tax on the charitable resources at our and other American colleges and universities,” according to a 2018 letter to Congress by forty-nine institutions that urged lawmakers to modify or repeal the tax.

Drew Faust, Harvard’s then president, called the tax “a blow at the strength of American higher education” that would “weaken our ability to support students and research.”

The push to revise the federal endowment tax is ongoing. This year, Cornell University hired the lobbying firm Capitol Tax Partners to lobby on endowment taxes, the first time the school has hired an outside lobbying firm in decades, according to records dating back to 1999.

Additionally, the lobbying group AICUM recently met with Massachusetts lawmakers including Democratic congressmen Richard Neal to discuss “many issues top of mind for those of us committed to the mission of private, nonprofit higher education.” Representative Neal, who is a ranking member of the House Committee on Ways and Means that handles federal taxes, has previously tried to ease back Trump’s endowment tax on wealthy universities.

Rising Cost of Public Education

If the new Massachusetts endowment tax bill passes, thirteen private colleges and universities in the state, including Harvard, Amherst College, Williams College, and the Massachusetts Institute of Technology, would be subject to the annual 2.5 percent excise tax. And unlike the federal tax, this tax would be on the schools’ total endowments, not just the income they make from it every year.

The resulting $2.5 billion in annual revenue — most of which would come from Harvard — would be distributed to meet the rising costs of public higher education, early education, and childcare. Since 2015, the average cost of public colleges and universities in the state has increased by 45 percent. Meanwhile, funding for public higher education has decreased by 14 percent, or roughly $2,300 per student, since 2001, according to the Massachusetts Budget and Policy Center.

Public colleges and universities in Massachusetts now cost an average of $12,458 in annual tuition, according to the Massachusetts Department of Higher Education. Almost 153,000 undergraduate students enrolled in these schools last fall, costing a total of $1.9 billion.

That cost is putting many people into debt: 64 percent of graduates from the University of Massachusetts Amherst — the state’s most well-attended public institution — graduated with debt during the 2019–2020 school year, according to the Institute for College Access & Success, a research and advocacy group.

“For so many families, the cost of going to public higher education is insurmountable,” said Democratic state representative Natalie Higgins, cosponsor of the endowment tax bill. “We’re asking for a portion of [private schools’] profit that is made from investments to be redistributed. It’s the least they can do.”

Massachusetts’ wealthy universities aren’t fond of the idea. Last year, AICUM, the state industry group, spent $136,748 on lobbying, including opposing the state endowment tax bill, which was first proposed in February 2023. Harvard spent another $250,000, including payments to the law firm O’Neill, Athy & Casey that lobbied on “proposals related to endowment tax.” Boston University, another member of AICUM, also opposed the bill, spending $70,000 on lobbying.

This isn’t the first time Massachusetts lawmakers have tried to tax private university endowments. In 2008, former representative Paul Kujawski, a Democrat, introduced a 2.5 percent endowment tax bill, but it quietly died before reaching a vote. The same 2.5 percent tax was proposed again in 2017, and after much pushback from AICUM and individual institutions, the legislation died once again.

“No entity wants to be told how to spend their endowment profit,” said Democratic Massachusetts representative Christine Barber, another cosponsor on the endowment tax bill.

Harvard did not respond to a request for comment, while Boston University deferred to AICUM.

“Targeting [endowments] will have the exact opposite effect for affordability and access,” said Hagopian of AICUM. “The focus should always be on the students, and this is why the sector continues to advocate at both the state and federal levels for financial aid, to ensure that every deserving student can attend the college that is the best fit for them and their families.”

This is a common argument made by universities: that an endowment tax would limit their ability to provide financial aid to students. But while a 2022 study by University of California, Santa Cruz economist George Bulman found that colleges and universities with larger endowments do in fact provide more generous aid, it also found that these schools enroll fewer low-income students and students of color.

They appear “to use greater endowment wealth to increase spending and to become more selective, resulting in higher institutional rankings, but do not increase the size or diversity of their student bodies,” Bulman wrote.

Meanwhile, an increasing amount of college endowment funds have been invested into private equity and venture capital over the past two decades. That’s a problem, say critics, because as the cost to attend college soars, these institutions are lining their pockets and those of fund managers, courtesy of Wall Street ventures that are ruining the world.

On average, colleges with endowments over $1 billion invest 18 percent of their endowment portfolios into private equity, and more than 14 percent into venture capital, according to a study by the National Association of College and University Business Officers. But some wealthy institutions go much further; Brown University, a member of the Ivy League, dedicated 43 percent of its endowment to private equity in fiscal year 2022.

These investments can bring massive returns. According to Harvard’s financial reports from fiscal years 2013 to 2023, the university’s average endowment return was 10 percent, with a 34 percent return in 2021 that increased the endowment by $11.3 billion.

An Eye on Endowments

Massachusetts isn’t the only state trying to tax big university endowments. Democratic lawmakers in Rhode Island, home to Brown University, introduced a bill last year that would tax private college and university endowments up to 2 percent and distribute that money into the public school system. The legislation received substantial pushback from Brown, which has an endowment of $6.6 billion, and died in committee last year.

Similarly, a 2023 bill introduced in Connecticut would have allowed municipal governments to tax private university endowments. But Yale, an Ivy League institution with a $40.7 billion endowment that’s second only to Harvard, pushed back against the bill, claiming the “benefits of the charitable gifts that comprise Yale’s endowment are evident throughout Yale. They are the foundation for the many ways Yale contributes to a better New Haven and a better Connecticut.” The legislation died in committee.

Republican lawmakers have also set their sights on university endowments, with several proposed federal bills. Arkansas senator Tom Cotton introduced the Woke Endowment Security Tax Act last December that would institute a 6 percent excise tax on ten American universities, nine of which are in blue states. “The revenue from the taxes — $15.47 billion — would act as a source of funding for money going to aid Israel’s war against Hamas, Ukraine’s war against Russia, and to efforts to secure the southern border,” noted a news release from Cotton’s office.

Ohio senator J. D. Vance also tried to raise the excise tax on endowment investment income introduced by Trump’s Tax Cuts and Jobs Act from 1.4 percent to 35 percent. This would have applied to “secular, private colleges and universities” with assets of $10 billion or more. Vance’s bill was blocked by Democrats last December.

These efforts have come amid the Republican party’s increasingly impassioned attack on “liberal arts education.” Harvard alumni Jane Chung, who has spoken out about university tax breaks, tld news media organization More Perfect Union that this was a co-opting of the push to make public education more accessible and affordable by right-wing interests “in the name of culture war.”

But the issue is not about attacking universities over their politics. The real purpose of endowment taxes is to make wealthy institutions give back to their communities, said Morgan.

“Wealthy institutions, the Ivies, those with huge endowments, have forgotten that they are an organization that should be serving the public good,” Morgan said. “They’re starting to see themselves as a luxury brand.”