Ivy League endowments face 1.4% levy under Trump tax overhaul

The Internal Revenue Service has released rules with the formula that determines how much Ivy League universities and other wealthy colleges will pay under a new tax.

The rules define how colleges and universities count the number of full-time students and offer some guidance about what income and assets are subject to the tax. Those factors and others will determine how much they will owe on their investments under the new 1.4 percent excise tax, according to IRS guidance issued Friday.

In the crosshairs are some of the richest research universities, including Harvard, Yale, Stanford and Princeton, as well as liberal arts colleges with sizable endowments such as Iowa’s Grinnell College, Williams College in Massachusetts and Swarthmore College in Pennsylvania.

Harvard University in Cambridge, Massachusetts
Harvard University in Cambridge, Massachusetts. Photographer: Michael Fein/Bloomberg

The endowment tax — included in President Donald Trump’s 2017 tax overhaul to offset some of the tax cuts — affects private colleges and universities with at least $500,000 of endowment per student. Schools have been waiting for the government to reveal how endowments are counted and what constitutes a student before they can calculate their tax bill.

The tax, which most affected schools will pay this fiscal year for the first time, is based on investment returns for the fiscal year, which for most colleges ends June 30. Schools typically don’t announce revised values for their endowments until the fall.

In total, approximately 30 schools have been expected to reach the threshold, based on U.S. Education Department data and the endowment values of June 2018, the most recent available, when many reached record high values. Unaffected colleges worry that the tax could be widened to add public universities, or that Congress could tweak the threshold to pull in more schools.

Endowments grow from investment returns and tax-deductible gifts. They hold assets of about $617 billion, concentrated among the richest institutions, according to the most recent data from the National Association of Colleges and University Business Officers. The wealthiest is Harvard with $39.2 billion.

Hoping to Skirt

Colleges may be looking for ways to avoid paying the tax, according to research published in 2018 by the Federal Reserve Bank of Cleveland. Some schools may increase their enrollment -- or change how they classify students — to lower their endowment-per-student ratio to skirt the tax.

They have also been lobbying Congress to repeal the tax entirely. A bipartisan bill proposed in 2018 hasn’t been re-introduced in the new Congress. Representative Tom Reed, the New York Republican who developed the plan for the endowment tax, has proposed giving institutions more exceptions in exchange for spending more on aid for middle-income students and disclosing information about fees paid to outside investment managers.

The tax is estimated to raise about $200 million a year, according to the nonpartisan Joint Committee on Taxation.