Call it the liberal (arts) penalty.
This year’s tax overhaul slapped a 1.4 percent levy on the annual investment income of the wealthiest private university endowments. Republicans targeted the measure so narrowly that it ended up as a tax almost entirely on elite blue-state institutions.
Twenty-two of the 28 colleges that are likely to be subject to the tax reside in Democratic Congressional districts, and those schools could pay 90 percent of the $200 million a year the government expects to collect, according to a Bloomberg analysis.
It’s a form of political payback, some academics say. Their complaints echo those of Democrats in New York, Connecticut and California about Congress’s slashing of deductions for their high state and local taxes. Republicans have long attacked higher education as a bastion of liberalism that is intolerant of free speech, featuring bloated bureaucracies that hoard endowment money while raising fees that now can exceed $60,000 a year.
“Some Republicans are saying, ‘Why are we subsidizing this by giving them special tax privileges?’’’ said Richard Vedder, an economist who directs the Center for College Affordability and Productivity at Ohio University and an adjunct scholar at the right-leaning American Enterprise Institute. “It’s arguably somewhat justifiable on public policy grounds. It sends a message to universities that we are annoyed at you.’’
The tax hits private blue-state institutions in part because that’s where the money is. Harvard, Yale, Stanford, Princeton and MIT alone account for a quarter of the $500 billion in university endowments. Harvard—the richest college, with $37 billion in investments, or more than $1 million per student—figures it would have paid $43 million in its most recent fiscal year.
Responding to an outcry from colleges, Congress ultimately narrowed the tax. Only institutions whose endowments have at least $500,000 per student would pay, up from $250,000 in an earlier version of the legislation.
The move eliminated several colleges in red districts, including Earlham in Indiana and Hillsdale, the Michigan Christian college with close ties to Education Secretary Betsy DeVos. (Earlier, Republicans had crafted a provision that would have exempted just Hillsdale, but dropped it after opposition from Democrats.) The tax continued to ensnare tiny but rich blue-state liberal arts colleges such as Williams and Amherst in Massachusetts and Pomona near Los Angeles.
Lobbyists, college presidents and alumni made repeated appeals to their members of Congress—traditionally protective of prized institution in their districts. In the past, these powerful allies have beaten off Congressional attacks with the help of their bipartisan clout in Washington.
They tried mightily this time as well. A campaign headed by Republican Lamar Smith of Texas, an alumnus of Yale University, drew bipartisan support from more than 40 members of Congress. They included Republicans such as Rod Blum, who represents the Iowa district that is home to Grinnell College, and Bradley Byrne, a Duke graduate who represents Alabama. “Taxing endowments would reduce funds available for financial aid, drive up tuition costs and jeopardize the future of private colleges and universities,’’ the lawmakers wrote in a letter to Congressional leaders. “How do the American people benefit from that?’’
Top Republicans were unmoved. “In the end, they wanted this endowment tax badly enough that it didn’t really matter who it affected,’’ said Karin Johns, director of tax policy for National Association of Independent Colleges and Universities.
Lauren Aronson, a House Ways and Means Committee spokeswoman, said the tax’s structure protects smaller endowments and exempts public universities—merely subjecting the wealthiest schools to the same tax private foundations face.
That’s little solace for the six colleges in red-state districts that are likely to pay the levy. (Bloomberg came up with its list using the latest available endowment values and federal enrollment data. The government hasn't yet specified how it will calculate the tax, so the precise number of schools subject to it will depend on its method.) These unlucky few include Indiana’s Notre Dame, where U.S. Vice President Mike Pence gave a commencement address in May, and Grinnell, whose state has long been represented by powerful Republican Senator Chuck Grassley.
Officials at Grinnell, which has a $1.87 billion endowment, petitioned Iowa’s Congressional delegation. President Raynard Kington also reached out to Tom Cole, a Republican U.S. Representative from Oklahoma—and, more to the point, a Grinnell graduate who received an honorary degree from the college in 2016.
A health-care economist and physician, Kington said colleges, which often fail to promote accomplishments in science and medicine, are paying the price for the scarcity of conservative voices on campus and concerns with political correctness drowning out free speech.
“This was an easy way to demonstrate a lack of love for a certain group of institutions within the political arena,” Kington said.
Republicans did try to exempt Berea College, a private school in Kentucky with a $1 billion endowment, whose state is represented by Senate Majority Leader Mitch McConnell. Berea, which charges no tuition, enrolls 1,600 low-income students, mostly from Appalachia. Berea says the tax could cost the school $1 million a year and lead it to enroll 30 fewer students. Democrats refused to carve out a single college in a Republican district. Berea President Lyle Roelofs said McConnell told him he was still looking for a way to spare the college.
At Virginia’s Washington and Lee University, which said the tax would have cost $825,000 last year, officials pressed their U.S. Representative, Republican Bob Goodlatte. They also reached out to Republicans in Texas, Georgia, Kentucky and North Carolina, according to Steve McAllister, vice president of finance.
In a statement, Goodlatte said a tax could encourage spending more capital on lowering tuition, but he still had concerns about it and was looking for an “equitable solution.’’
In perhaps the unkindest cut of all, William Dudley, Washington and Lee’s president, didn’t even get to speak with Goodlatte until after the Senate vote. By then, of course, it was too late. The school might have expected more deference considering where the congressman earned his law degree: Washington and Lee.
