Under a new bill that was vetoed by the House of Representatives on Thursday, republicans in the US Congress are pushing for higher taxes on US universities.
The bill’s supporters argue that a provision relating to higher educational institutions is crafted to target “woke” universities.
US President Donald Trump’s executive orders and decisions, as well as crackdowns on pro-Palestine protests that took place on US college campuses last year, have hurt universities.
The new tax policies aim to raise taxes on the endowments US universities make.
So, what exactly is an endowment?
A university’s endowment refers to funds or assets that have been given to ensure its financial viability in the future.
Alumni, other donors, and business donations are typically the backbone of endowments.
The bill before the US Congress sets tax rates for universities based on their effective endowments per student – by dividing their total endowments by the number of full-time students at the institution.
If the bill becomes law, endowments investments will be taxed.
Have universities been subject to any taxes so far?
Most colleges have not been taxed on their endowments for centuries.
Educational institutions were exempt from the 1909 Revenue Act’s exemption as nonprofits that “only serve religious, charitable, or educational purposes.” Educational institutions were unable to deduct taxes on the gains from their investments as a result.
This changed during Trump’s first presidential term. The Tax Cuts and Jobs Act, which was passed by the US Congress in 2017, imposed a 1.4 percent tax on colleges with at least $500,000 in tuition-paying endowments and at least 500 students. Therefore, the tax only applies to some of the nation’s wealthiest institutions.
This endowment tax generated approximately $380m in 2023, from 56 universities that met the taxation bar.
Republicans’ current goals are what?
What Trump and the bill’s authors have referred to as the One Big Beautiful Bill, which was passed by the Republican-controlled House of Representatives on May 22. Within this bill is a proposal to raise taxes on elite universities.
The proposal has three goals and seeks to levy a tax on:
- Institutions with per-student endowments greater than $500 000 but less than $750 000 receive a return on investment of 1.4 percent.
- 7 percent on institutions that have a per-student endowment of more than $750, 000 but less than $1, 250, 000.
- institutions with a per-student endowment of more than $1,250 000 but less than $2,500 000.
- institutions with more than $2, 000 in per-student endowments are 21% higher.
These percentages apply to universities that had at least 500 tuition-paying students in the previous taxable year and where 50 percent of their full-time tuition paying students are in the US. This tax does not apply to universities that have been designated as “qualified religious institutions.”
Republican lawmakers in the House’s oldest tax-writing body, the Ways and Means Committee, wrote the proposal.
“For too long, universities have received beneficial treatment from our tax code while disregarding the interest of taxpayers”, Jason Smith, Missouri Republican and chairman of the House Ways and Means Committee, said shortly after the bill passed.
According to a fact sheet from Smith, the tax “holds woken, elite universities accountable” because they “operate more like major corporations and other tax-exempt entities.”
Republicans now control the Senate, where Democrats control 47 seats, while Democrats control the bill. It is unclear when the vote will take place, but Trump is urging Republican senators to promptly pass it.
Trump reaffirmed on his Truth Social platform on May 22: “Thank you to every Republican who voted YES on this historic bill! Our friends in the US Senate now need to “get to work” and “send this Bill to my desk as soon as possible.”
How many colleges could be affected by this?
At least 58 schools could potentially be impacted by this, according to a study by The New York Times.
The highest tax rate could apply to major universities.
In the 2024 fiscal year, Harvard University’s total endowment was worth approximately $53.2bn – the largest of any university. The endowment for each student at Harvard is $2.16 million, with a total of 24 596 students. If the bill becomes law, it will have to pay a 21 percent tax.
Yale University’s endowment is valued at $41bn and the university has 15, 490 students, bringing the per-student endowment to about $2.7m. If the bill becomes law, the institute will also have to pay a 21 percent tax, compared to the current 1.4 percent.
Stanford has a total endowment of $ 36.5 billion, and its population is 17 529 students, or $ 2.21 million per student. While the institute currently pays the 1.4 percent tax, it will have to pay a 21 percent tax if the bill becomes law.
In contrast, the University of Pennsylvania’s total endowment was $22.3 billion as of June 2024, and it had 24, 219 full-time students, or $ 920, 764 per student. The institute will have to pay a 7 percent tax if the bill becomes law, compared to the current 1,4 percent tax.
But because the bill determines which universities are taxable based on per-student endowments, it isn’t just big schools that will be affected: Even smaller private institutions, that previously paid 1.4 percent tax, might now have to pay much more.
In 2024, Pomona College in Claremont, California, used 5 percent of its annual endowment to date.
Endowment, which accounts for about half the institute’s operating budget, accounts for $36 million in financial aid for the university. It has 1, 747 students, which means Pomona has a per-student endowment of $1.7m. It currently owes 1.4 percent of the endowment, but if the bill is passed, it will be taxable at 14%.
Can this be put into effect?
If the bill passes in the Senate, Trump is almost certain to sign it.
However, the House version of the legislature that escapes Congress might be different.
It’s possible that the Senate changes the tax’s amount and the application criteria in the process, according to Emily Saulnier, editor-in-chief of the Boston College Law Review, a publication at Boston College Law School.
Centrist and conservative Republicans in the Senate are divided on the bill. Republican senators should have it as little as possible, according to House Speaker Mike Johnson. The House will need to vote on the revised text in order for Trump to receive it, who will sign it into law, if Senators approve it.
Wisconsin Republican Senator Ron Johnson has opposed the bill in its current form, arguing it will increase the national deficit, which is the difference between the amount of money the federal government spends and the amount it earns through revenue. According to Johnson, the House bill would “add $4 trillion” to the deficit. The deficit was $1.83 trillion in 2024.
Republican Kentucky Senator Rand Paul raised similar concerns during a Fox News interview on May 25, saying while he supports parts of the bill, it would “explode the debt”.
However, according to Saulnier, “it will apply to all colleges and universities” that meet the requirements if the bill is passed and Trump signs it, .
What has the response been in universities?
“This legislation presents a greater threat to Yale than any other bill in memory”, Yale President Maurie McInnis said in a statement released on May 22.
By making college less affordable, the endowment tax “imposes on students more of a financial burden.” According to her, “taxing schools reduces the amount of money available for financial aid,” adding that the endowment tax will undermine the nation’s technological leadership globally.
During a faculty meeting in 2024, Harvard President Alan M Garber called a raise in endowment taxes “the threat that keeps me up at night”.
What brought us here?
Higher education institutions have been repeatedly attacked by the Trump administration, claiming that they do not prevent anti-Semitism or that there is “illegal and immoral discrimination” through diversity, equality, and inclusion (DEI) programs.
Last year, pro-Palestine protests and encampments sprang up in several US universities, including Columbia, Yale, New York University (NYU) and Harvard.
Executive department heads are required to submit a report on all criminal and civil authorities and anti-Semitism-fighting initiatives on January 29th, according to an executive order signed by Trump.
Trump stated in a White House fact sheet that, “To all the resident aliens who joined the pro-jihadist protests, we put you on notice: come 2025, we will find you, and we will deport you.” I will also quickly cancel the student visas of all Hamas sympathizers on college campuses, which have been infested with radicalism like never before”.
Since then, Trump has frozen federal funding for Harvard and Columbia universities.
Universities are even more reliant on their endowment funds to continue conducting research now that that funding is in danger.
However, endowments are subject to restrictions and donors decide how most of the endowment is spent. Donors in Harvard’s case choose how much of the endowment money is spent each year.
The Trump administration suspended Harvard’s ability to enroll any new foreign students on May 22. This move has been temporarily blocked by a federal judge.
