The recently enacted federal tax legislation levies a tax on the endowment income of colleges and universities with large endowments.
- The endowment income tax imposes a tax of 1.4 percent of the net investment income of institutions of 500 or more full-time equivalent students with large endowments.
- The ambiguity of the bill means that it is impossible to accurately determine which colleges and universities will pay the tax now and, say, over the next decade. But, with a few assumptions, one can get an idea of 23 institutions that are at highest-risk of paying the tax (see chart). Thirteen more fall into a high risk category and an additional 17 face moderate risk. (Click here for a full listing of schools).
- One stated rationale for the law is to encourage schools to lower their prices and offer more generous aid. The affected schools’ “sticker price” of upwards of $70,000 is clearly unaffordable for many, if not most, students and their families. But the schools already have generous financial aid policies and are unlikely to reduce their sticker price as a result.
- Another plausible rationale is to generate tax revenue that can help offset tax cuts introduced elsewhere. Yet the amount of tax that is likely to be collected is small. Over the next decade, the tax would generate perhaps $3 billion in revenue. This would offset 0.2 percent of the $1.5 trillion in total recently enacted tax cuts.
- The endowment income tax, like the cap on the deductibility of state and local taxes, has disproportionate effects on institutions located in states that have voted for the Democratic candidate in recent presidential elections (“blue states”).
(This is an interactive graph. Hovering over the dots reveals institution names.)