Dear Elite Universities, Use it or Lose it.
A recent tax on university endowments sends an important message to the wealthiest schools
Imagine hundreds of billions of dollars hidden throughout the US, stashed away in sleepy towns like Swarthmore and South Bend far away from the prying eyes of the IRS. This might sound like a libertarian fantasy, but until recently it was reality for elite colleges across the country. Until 2017, the roughly $700 billion of college endowments in the US went untaxed. Now, despite renewed lobbying efforts, extremely wealthy universities are required to pay a 1.4% tax on their endowment investment returns.
A 1.4% tax might not seem like much to you and me. After all, it’s lower than any statewide sales tax in the US. But it sends an important message: Use it or lose it.
Very few charities in the US pay taxes. Since charitable organizations already provide needed services to their communities, it doesn’t make sense to take funds away from their work. And if part of non-profit universities’ work is setting up a rainy day fund, it makes sense not to tax those accounts.
The issue is that these wealthy institutions don’t use their rainy day money to help students. During the pandemic, when students and their parents faced sudden financial insecurity, endowments exploded in value. Last year, endowments in the Ivy League alone grew by nearly $50 billion. At the same time, schools like Yale, Dartmouth, Brown and Harvard increased undergraduate tuition. If a global pandemic isn’t enough reason for universities to spend their rainy-day money, they never will. Money sitting in an investment banker’s portfolio in perpetuity serves no charitable purpose, and thus ought to be taxed.
But just because large universities aren’t using their money, that doesn’t mean they won’t fight like hell to keep it. Per reporting from Lee Fang of The Intercept, records show that some colleges mobilized teams of lobbyists to persuade lawmakers to repeal the tax. Emails obtained by Inside Higher Ed show Harvard administrators urging their colleagues to reach out to Democratic congresspeople to request a reduction of Harvard’s tax burden.
These lobbyists claim that by taxing endowment funds, we limit schools’ ability to provide scholarships to low-income students. Thus, they say, the tax would hurt our most vulnerable students.
But Harvard has a $53.2 billion endowment. That’s larger than half the world’s economies. If Harvard wants to better support their low-income students, a 1.4% tax isn’t stopping them. Moreover, extremely wealthy universities just aren’t the forces of upward mobility they claim to be.
While attending an elite university can be a life changing opportunity for low-income students, very few poor students get the chance to enroll at these schools. Per a groundbreaking study by the Equality of Opportunity Project, at Columbia University, the most income-egalitarian Ivy League college, only 5.1% of students come from the bottom 20%. Over two times as many come from the top 1%. 38 of the nation’s most well-endowed schools have more students from the top 1% than from the bottom 60% combined.
The schools that give the most students access to upward mobility, per the same study, are the ones that accept large numbers of low-income students. Many of the university systems that promote mobility, like the CUNY, SUNY, and Cal State schools, are publicly funded, meaning they’re exempt from the tax.
Moreover, the tax is narrowly tailored — only schools with endowment sizes over $500,000 per student are affected — meaning it only applies to schools with enough funding that a 1.4% tax is not a significant burden. In short — this tax doesn’t harm low-income students. If anything, it could be used to supplement funding for larger, more accessible public universities.
Fortunately, it seems unlikely that Congress would repeal this tax. Republicans support it because they see the tax as a rebellion against the too-woke academic elite, and it would be difficult to sell lowering taxes on wealthy, elite institutions to Progressives. If anything, Congress should consider raising the tax as time goes on. Elite universities rarely pay property taxes, seriously straining local communities. As endowments continue to grow (the Ivies alone are projected to have over one trillion dollars in endowments by 2050) we must grapple with how to hold these institutions accountable to the interests of the nation, not just their financiers.
Originally published at https://virginica.substack.com on August 9, 2022.