The U.S. Treasury Department has escalated an effort to strip schools, including universities, of their special tax-exempt status if they consider race in admissions, scholarships or other areas, a potential blow to the financial stability of hundreds of educational institutions.
The department and the Internal Revenue Service unveiled a proposal Thursday that would revoke colleges' and universities' tax-exempt status, which permits their donors to deduct donations. That status also allows schools to sell tax-exempt bonds and avoid a tax on investment income.
Treasury Secretary Scott Bessent made clear targets of the proposed regulations would include schools with Diversity Equity and Inclusion policies that the administration concluded amounted to racial preferences.
"Schools rebranding race-based preferences as equitable, inclusive or diversity-enhancing does not change their discriminatory nature," Bessent said in a statement announcing the plan.
The proposal is the latest move from President Donald Trump's administration to put restraints on higher education, which the president has sought to overhaul during his second term through legal action, frozen research funds and tighter federal borrowing restrictions for students.
It would also extend to tax-exempt private elementary and high schools. The Treasury Department estimated the proposal would affect as many as 18,000 private educational institutions.
The plan, which is not yet final, would go even further than a 2023 Supreme Court decision that bars schools from considering race in admissions, by revoking tax-exempt status if a college or university favored any racial groups in matters such as financial assistance, loans, education policies, scholarships, athletics and "every other school-administered or school-supported program."
Currently, schools can retain their tax-exempt status if their favoring of racial minority groups is for the "purpose and effect" of promoting the institution's "racially nondiscriminatory policy."
Schools have moved to eliminate race-based scholarships and admissions following the Supreme Court ruling. But the Treasury proposal could endanger student groups, race-focused disciplines and mentorship programs designed to support students of a specific race or ethnicity that have been allowed to remain, so long as people of all backgrounds may apply or participate.
The guidance would define race as including color and national or ethnic origin. It would effectively require schools to adopt race-blind policies or risk incurring hefty tax bills.
It would exempt religious affiliation, allowing faith-affiliated schools to admit students based on religion, consistent with current law. The proposal would allow schools to assist disadvantaged students using race-neutral criteria, including income, geography, first-generation status, military family status and more when awarding admission and financial assistance.
The proposal is not the administration's first stab at undermining higher education institutions' special tax status. Last year's sweeping tax law raised the rate of an endowment tax enacted during Trump's first term that applies to some wealthy private schools.
The administration has been considering the proposed rules
Tax-exempt colleges are already subject to unrelated business income tax on activities or businesses not related to their educational mission such as parking garages.
The administration last year threatened the tax-exempt status for Harvard University. A Bloomberg News analysis estimated that Harvard's tax benefits totaled at least $465 million in 2023.
Previous efforts to use the tax code to force charitable organizations to comply with public policy have been met with controversy.
In 1983, the Supreme Court upheld an IRS decision to revoke Bob Jones University's tax exemption over an explicit policy that prohibited interracial dating, saying that the government's "fundamental, overriding interest in eradicating racial discrimination" outweighed the university's exercise of its religious belief. Conservative legal scholars have since criticized the decision, arguing that it could be applied in ways that would force religious organizations to go against their beliefs.
The impact of the proposed guidance could create ripples far beyond universities to philanthropic giving as a whole, raising questions about whether charitable organizations that are tax-exempt can make donations not just on the basis of race, but also other protected characteristics like gender, disability and age.
