A proposal to tax private college endowments included in the House Republican tax package unveiled Thursday could cost schools like Union and Skidmore colleges hundreds of thousands of dollars each year.
The new tax targets the investment income of the country’s wealthiest private college endowments – those worth more than $100,000 per student – and represents a new tax in a proposal that seeks to slash personal and business income tax rates.
The House proposal calls for a 1.4 percent tax on investment income of private college endowments, and early reports suggest a similar tax is also under consideration in the Senate. Lawmakers in recent years have proposed different ways of taxing college endowments, as private colleges have come under criticism for continuing to increase tuition while sitting on big endowments.
While endowment investment income varies from school to school and year to year – many colleges shed endowment wealth between 2015 and 2016 – the proposed tax could cost colleges like Skidmore and Union well into the six figures.
In 2014, for example, Union reported over $62 million in investment income from its endowment, according to financial statements. Taxed at 1.4 percent, the school could have owed the federal government over $800,000 that year. In 2015, Union reported investment gains of over $31 million, which under the proposal would have come with a tax bill over $400,000.
Union’s endowment was worth over $360 million as of June 2016, the most recent financial statement available, but had topped $400 million in 2015. Skidmore’s endowment was worth nearly $330 million in 2016 and had topped $350 million the year before. Nationally, college endowments rebounded and saw strong growth last year, but individual schools have yet to post 2017 financial statements.
University at Albany economics professor Michael Jerison said private colleges would likely shift investment strategies to reduce tax exposure if they faced an endowment tax in the future. He also said the private colleges’ current tax-free status could be viewed as a subsidy that benefits them to the detriment of other programs.
“It’s as if the universities who have a significant endowment are operating a business that is an investment banking business that helps finance their education business,” Jerison said. “But they are not paying taxes the way an investment bank would."
Jerison said an endowment tax would have the greatest impact on college’s already facing financial challenges.
“I think there are some colleges where there will be a significant effect if it actually happens,” he said.
Private college leaders and the organizations that lobby on their behalf started to raise concerns as soon as the endowment tax proposal was released, arguing the new tax could mean cuts to student scholarships, education programs and threaten the financial security of schools.
Union College President Stephen Ainlay said in a written statement Friday that an endowment tax “will have a negative impact on our institution and the students and families we serve.” He highlighted the college’s use of endowment funds to provide students financial assistance, attract quality faculty and increase student programs. He also referenced the college’s broader impact on the Schenectady community, which he argued could be harmed by the proposed tax.
“Non-profit colleges and universities are not the right place for the federal government to be seeking extra revenue,” he wrote. “These proposed changes to the tax code would severely threaten our impact on the [Schenectady] community.”
The Commission on Independent College and Universities, an organization that represents the state’s private colleges, also denounced the Republican tax proposal.
“Taxing these funds would directly harm students who could see less aid from their institutions,” Mary Beth Labate, the commission’s president, said in a statement.
Student loan interest deduction at risk too
The broader Republican tax proposal also envisions eliminating the deduction for interest paid on student loans. And with proposals to eliminate provisions dealing with tax breaks for tuition and scholarships, the higher education world is coming out strongly against the bill.
The American Council of Education, which represents nearly 1,800 colleges and universities across the country, estimated that the entire Republican tax proposal would raise the cost for students to attend college by over $65 billion over the next decade.
Jerison said the student loan interest on its own may not be a major tax saver for people but that it adds up when taken alongside deductions for mortgage costs and medical payments. With the tax bill doubling the standard deduction, Jerison said some people would benefit with the higher standard deduction while others would lose out from elimination of deductions.
With a student loan of $50,000 and an interest rate of 6 percent, someone using the interest deduction would save about $450 per year, Jerison said. While that in itself may not be a loss big enough to outweigh a higher standard deduction, paired with other deductions it could be.
“It adds to other deductions,” he said.
Jerison also warned that the proposal will likely change dramatically as lawmakers respond to public reaction and circle in on a final bill. But he said the proposal unveiled this week would likely increase federal deficits in the long run and that he didn’t think the tax cuts would result in the economic growth its advocates are promising.