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Treasury rules could thwart Sen. Mitch McConnell’s bid to protect Kentucky college from endowment tax

Senate Majority Leader Mitch McConnell (R) sought to protect Berea College, a school in his home state of Kentucky, from an excise tax. (J. Scott Applewhite/AP)

Senate Majority Leader Mitch McConnell (R) fought to shield Berea College in his home state of Kentucky from a hefty tax bill on its endowment. When an exemption that would have spared the school was removed from the GOP tax plan, McConnell successfully slipped it into the 2018 congressional budget deal.

Now, his efforts are being undermined by proposed rules issued by the Treasury Department.

Feds release long-awaited rules on college endowment tax

The 58-page draft regulation details criteria the federal government will use to apply a 1.4 percent excise tax on investment income at private colleges with a minimum of 500 tuition-paying students and endowments worth at least $500,000 per student. Treasury’s definition of “tuition-paying” could prove detrimental to Berea.

The school uses its $1 billion endowment to cover tuition for all of its roughly 1,600 students, one of a handful of colleges with that mission. The Kentucky school’s pledge that no one pays tuition should exempt it from the tax. In fact, Senate Republicans added the term “tuition-paying” to the endowment provision for that purpose.

The trouble is, Berea picks up the tab for tuition after all federal, state and private grants have been awarded. Because Berea students technically pay a portion of their tuition, they would be counted under Treasury’s guidelines.

Scholarships “provided by third parties, even if administered by the institution, are considered payments of tuition on behalf of the student,” Treasury wrote in the draft. “Accordingly, a student will be considered a tuition-paying student . . . if payment of any tuition or a fee is required for enrollment or attendance.”

The Treasury Department said the proposed regulations could change based on feedback from colleges and universities. The department is seeking comments within the next three months on whether certain definitions should be revised.

Those comments could simplify the regulations and reduce the number of schools affected. As it stands, the Internal Revenue Service anticipates that about 40 institutions will face the 1.4 percent tax.

“This is an example of a bill that was ill conceived and hastily drafted without really talking to higher-education stakeholders to understand the challenges involved in implementing this tax,” said Steven M. Bloom, director of government relations at the American Council on Education, an organization representing ­higher-education institutions.

College and university leaders have been vocal in opposing the excise tax, accusing lawmakers of sacrificing institutions of learning for the sake of corporate tax cuts.

Schools maintain endowments — a collection of tax-exempt donations and investments — to pay for salaries, research, financial aid and other expenses. Large portions of endowments are restricted to uses that donors stipulate. The money also helps colleges weather ups and downs in economic cycles.

While Republican lawmakers seemed unmoved by the tax’s potential effect on schools such as Harvard or Princeton universities, many rallied to Berea’s defense.

The school has been lauded as a model of affordability. A House Ways and Means subcommittee invited leaders from the college in 2016 to testify during a hearing on universities that use their endowments to lower student expenses.

McConnell, whose office did not respond to requests for comment, was livid after Sen. Bernie Sanders (I-Vt.) had the provision protecting Berea removed from the final GOP tax plan in an attempt to delay the legislation. The Republican said Senate Democrats “purposefully penalized” and “knowingly hurt schools that provide tuition-free education to students who can’t otherwise afford to go to college.”

The Senate majority leader vowed to help Berea — and did — but somewhere between the legislation and the proposed Treasury Department rules, his intentions were muddled.

McConnell attempts to protect two Kentucky colleges in budget deal

Berea President Lyle Roelofs said school officials are reviewing Treasury’s guidance.

“We understand that there may be a problem with the way the draft regulations have been written,” he said, in an email. “We will be weighing in with Treasury to clarify any impacts the draft language may have on Berea College to make sure that the final regulations reflect congressional intent.”

Berea’s mission of educating students from low-income families has made it a standout within the higher-education community.

All students are assigned campus jobs that often align with their academic pursuits. Ninety-eight percent of students have sufficient financial need to qualify for federal Pell grants. They receive enough in grants from federal, state and institutional sources to cover the lion’s share of the $44,100 annual total cost of attendance — tuition, housing, books and transportation, according to Berea.

During the tax bill negotiations, the college estimated it would have to pay the federal government about $1 million a year because of the excise tax, enough to cover the cost of attendance for about 22 students.