(Bloomberg) -- A proposed tax on some wealthy college endowments “has no clear policy objective other than raising revenue,” according to Cornell University, which joined other schools in opposing the provision in the House Republican tax bill rolled out Thursday.
Some private college endowments, many of which are at record values, would be taxed 1.4 percent on net investment income, according to the bill. The provision would increase revenue by $3 billion between 2018 to 2027, according to the joint committee on taxation.
Martha E. Pollack, Cornell’s president, said in a statement that the proposal “would likely have the perverse effect of making colleges and universities like Cornell more expensive while reducing our ability to provide quality education for economically disadvantaged students, conduct research for the public good, and undertake public engagement services.”
The tax applies to schools with assets of more than $100,000 per student and exempts small schools. Deductions for donations for seat licenses at sporting events would end. State colleges and universities aren’t included.
The Association of American Universities, which represents 62 institutions, also criticized the bill, saying Thursday in a statement that it’s a “short-sighted move” that will harm students and their families.
“Endowments support substantial student aid and student service programs, and provide funding for instruction, research, and for building and maintaining classrooms, labs, libraries, and other facilities,” Mary Sue Coleman, president of the association and former president of the University of Michigan, said in the statement.
Endowments have attracted attention from Congress over the years as they have grown to record values from investment gains and donations. Harvard University, the richest U.S. college, has an endowment of $37.1 billion, followed by Yale University at $27.2 billion and Stanford University at $26.7 billion.
Colleges have argued that their endowments can’t be spent like savings accounts, and they must legally honor donor agreements binding the way money is distributed. Colleges don’t pay taxes on their investment income and donors receive tax deductions for their gifts to colleges.
“It is not surprising that Congress is looking to these large accumulations of wealth when they are seeking revenue to fund their other programs,” Ray Madoff, a law professor at Boston College and an expert on tax law, said in an interview. “The concern is that these institutions are not simply charities using savings to carry out their charitable mission, but are also huge financial players using tax free money.”
The cost of college has been rising faster than inflation for decades, and the wealthiest schools keep getting richer. College endowments gained almost 13 percent on average on their investments for the year ended in June. About 800 colleges had $515 billion in assets as of June 2016.
A handful of schools rely on endowments for at least half of their operating budget, including Amherst College, Grinnell College and Princeton University.
Princeton said it provides financial aid to more than 60 percent of its students, and families with incomes below $56,000 pay no tuition, room, or board while families with incomes below $160,000 pay no tuition.
“Endowment earnings help pay for academic programs and student services, for libraries and laboratories,” Robert Durkee, a Princeton vice president, said in a statement. “Any expense the endowment covers is a cost that does not need to be charged even to students who pay full tuition.”
Yale this year plans to spend $1.3 billion from the endowment, representing about one-third of its budget. Spending from Yale’s endowment supports faculty salaries and student scholarships and is the largest source of revenue.
Some schools have large endowments and small student bodies. “Some look unnaturally large relative to their purpose,” Madoff said.
Among those liberal arts schools are Amherst College, with 1,800 students and a fund of $2.2 billion and Williams College, with about 2,100 students and a $2.5 billion endowment. Middlebury College, with about 2,500 students, had an endowment about $1.1 billion. Each of the endowment values are as of June 30.
“A tax would reduce the future value of many endowments and force institutions to rely more heavily on tuition revenue,” Bill Burger, a Middlebury spokesman, said in a statement. “In effect, this proposal would raise the cost of higher education over time when we need to work together to make access to higher education more available for future generations.”
The debate over requiring endowments to spend more has bubbled up in the past two years. Congress held two hearings and sent an inquiry to the richest 56 private schools. About two dozen schools have included protection of endowments’ tax-exempt status on their lobbying agendas.
Congressman Tom Reed, a Republican from Western New York and an early supporter of President Donald Trump, tried to steer the conversation to more endowment spending to reduce tuition costs for middle-income students. Under a draft plan earlier this year, Reed discussed using donor deductions to encourage spending from new gifts on those middle-income students.
David Camp, the former chairman of the House Ways and Means Committee, in 2014 proposed a 1 percent excise tax on the net investment income of universities with endowments that have at least $100,000 per student.
A discussion a decade ago in a Senate Finance Committee hearing helped spur action in spending. While legislation was never introduced, several of the wealthiest colleges changed their financial aid policies, awarding grants that don’t need to be repaid instead of loans.
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