Bill Waives Tax on Rich College Endowments If They Spend Enough

(Bloomberg) -- A New York Republican introduced legislation in the House that would waive the new tax on about 30 wealthy college endowments if they spend 25 percent of their annual investment earnings on reducing the cost for middle-income students.

Tom Reed, who has discussed for about two years the idea of such a bill to spend more for students getting insufficient aid, also wants U.S. colleges to provide more transparency. Under the bill he proposed Tuesday, all schools would have to reveal more details about pay and investment manager fees and submit cost-containment plans to the Treasury Department every five years to show how they will keep increases below inflation.

Endowments grow from tax-deductible gifts and colleges are the beneficiaries of government subsidies for endeavors from research grants to student loans. Congress has been eyeing endowment wealth for years as the price of colleges keeps soaring, and legislators finally passed the 1.4 percent excise tax on net investment earnings as part of the overhaul in December. Endowments hold assets of about $567 billion, concentrated among the richest schools.

Cost ‘Tool’

“This is a tool to hopefully be deployed to get those costs going down,” Reed, a House Ways and Means Committee member from Western New York who was an early supporter of Donald Trump’s presidential campaign, said in an interview. “We’ll suspend or remove that tax so long as you comply with that distribution factor.”

Nine House members, including Republican Bob Goodlatte as of May 21, have co-sponsored a separate bipartisan bill that would repeal the new excise tax without any strings. Reed’s bill doesn’t have co-sponsors.

Under Reed’s bill, students affected come from families earning less than 600 percent of the poverty level, or up to about $150,000 per year. The bill uses the same threshold from the endowment tax: colleges with more than 500 tuition-paying students and $500,000 in endowment assets per student would be affected. It would apply to public schools as well as private ones, though none of the publics would currently meet the criteria, according to Reed’s office.

Previously: For rich college donors, a favorite tax break is now in danger

The bill would also require colleges to make more information public beyond what’s available in their federal tax forms, such as the highest salaries, fees paid to outside investment managers and the number of students whose parents “donate large sums to the college.” The tax overhaul imposed a new excise levy on nonprofit leaders who earn more than $1 million in annual compensation.

The Internal Revenue Service hasn’t yet announced details about how the 1.4 percent endowment tax will be implemented. A recent study conducted by an economist and senior researcher at the Federal Reserve Bank of Cleveland said colleges may “behave strategically” to avoid paying the tax.

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