Bipartisan group in Congress joins fight to repeal tax on college endowments

  • A bipartisan group of lawmakers is working to build support for repealing a new excise tax on potentially billions of dollars in private college endowments.
  • The effort comes as Ivy League universities, which will bear the brunt of the tax, ramp up their lobbying efforts.
  • Harvard President Drew Faust is meeting with key members of Congress this week in Washington.
Harvard University campus in Cambridge, Massachusetts.
Michael Fein | Bloomberg | Getty Images
Harvard University campus in Cambridge, Massachusetts.

A bipartisan group of lawmakers is working to build support for repealing a new excise tax on potentially billions of dollars in private college endowments – just as some of the most prestigious schools in the country ratchet up their battle against the tax.

Rep. Bradley Byrne, R-Ala., and Rep. John Delaney, D-Md., sent a letter to colleagues this week seeking co-sponsors for a bill they introduced last month to eliminate the new fee. So far, Rep. Lamar Smith, R-Tenn., and Rep. David Cicilline, D-R.I., have signed on.

"Once a tax gets put in place … the tax can easily be raised," Delaney told CNBC. "I think every academic institution should be offended by this."

The effort comes as Ivy League universities, which will bear the brunt of the tax, ramp up their lobbying efforts, with Harvard President Drew Faust meeting with Byrne and Delaney in Washington this week. The university boasts a $37.1 billion endowment, the largest in the country.

"Endowments are a crucial way in which colleges and universities fund financial aid that expands affordability and access, groundbreaking research that leads to cures and scientific discovery, and campus development projects that create jobs and economic growth locally," Faust said in a statement to CNBC. "They are not a rainy-day fund set aside for the future."

Uncertain numbers

Under the sweeping overhaul of the tax code that Republicans passed last year, private colleges must pay a 1.4 percent annual excise tax on the gains in their endowments. The provision only applies to institutions with endowments larger than $500,000 per full-time student.

About 30 schools are likely to be affected, according to a list compiled by the National Association of Independent Colleges and Universities. It includes some of the most prestigious schools in the country: Princeton, Yale, Dartmouth, Stanford and MIT, among others.

According to government estimates, the provision will raise nearly $2 billion over the next decade, helping to offset the $1.5 trillion price tag of the new tax law. Harvard projected it would have paid $43 million on its endowment gains if the levy had been in place last fiscal year. MIT predicted the tax will cost it at least $10 million next year.

But those numbers are highly uncertain, said Karin Johns, tax policy director at the NAICU. Endowment funds used for educational purposes are exempt from the tax, but lawmakers did not define what that means.

At Harvard, for example, endowment funds cover about 36 percent of the university's operating budget – a larger share than tuition. The endowment also pays for financial aid for lower-income students, Faust said, and it is unclear whether that money would be subject to the new levy.

Without guidance from the Treasury Department and the IRS, the precise financial toll on universities remains uncertain. But Johns said many schools believe the tax will be "devastating."

"They just feel like they're going to have their hands tied on what they can spend their own money on on their own campuses," she said.

Targeted by Trump

But the massive size of colleges' private endowments have come under fire from President Donald Trump, who criticized how schools spend their money while he was on the campaign trail. He promised to crack down on "special tax breaks" as a way to reduce the cost of higher education.

"These huge multibillion-dollar endowments are tax-free, but too many universities don't use the money to help with tuition and student debt," Trump said during a rally in Pennsylvania in September 2016. "Instead, they use the money to pay administrators or put donors' names on buildings."

Delaney said the new tax is being used as a political weapon – a stick in the eye of institutions that some Republicans view as breeding grounds for liberal world views.

"They may not like what they have to say, but they shouldn't be using the tax code to attack the academic freedom and the free speech that these institutions should have protected and enjoy," Delaney said.