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Colleges mobilize to fight House GOP’s proposed endowment tax

Princeton University in New Jersey has one of the nation’s largest endowments. (Mark Makela for The Washington Post)

Higher education leaders are mobilizing against a House Republican proposal to tax the endowments at dozens of private schools, including Ivy League universities and liberal arts colleges in the nation’s heartland.

A provision in the sweeping tax-overhaul bill expected to come to a vote soon in the Republican-led House would impose a 1.4 percent excise tax on investment income at private schools with endowments worth at least $250,000 per full-time student.

About 60 to 70 private schools could be affected, analysts have found. They include big names such as Princeton, Harvard and Stanford universities and some that are lesser known, including Agnes Scott, Berea and Grinnell colleges.

House Ways and Means Committee Chairman Kevin Brady (R-Tex.) said this week that the provision aims to put endowments of those nonprofit colleges and universities “on equal footing” with private foundations that are also taxed. College and university leaders say that comparison is unjustified because colleges and foundations have different missions. They fear that a new tax could drain essential funds and deter potential donors.

House GOP trims total of colleges targeted for new endowment tax

“We’re deeply concerned about it and think it could be very damaging to the excellence of higher education in America,” Princeton President Christopher L. Eisgruber said. He said Princeton’s $22 billion endowment is a crucial source of funding for financial aid and other operating expenses. “There’s a basic principle at stake here. You should not tax charity to raise revenue.”

Congressional analysts estimate that the proposal would raise nearly $3 billion over a decade.

From time to time, Congress has scrutinized the endowments that colleges have amassed through generations of fundraising and investment. Skeptics often ask why wealthy schools hoard cash while middle-class families strain to cover ever-rising tuition bills.

Colleges have a ready answer: They say their endowments actually help contain the cost of higher education, providing a steady source of money 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. And, of course, endowment values can be volatile. Some plummeted in the 2008-2009 financial crisis.

At Grinnell, the $1.6 billion endowment provides more than half of annual operating funds. The liberal arts college in rural Iowa spends $50 million a year on financial aid and has an economically diverse student body. Federal data shows that 90 percent of its 1,700 undergraduates receive grants or scholarships. The proposed tax could siphon away at least $1.5 million a year, Grinnell President Raynard S. Kington said.

“It’s a crude instrument that’s going to have a lot of collateral damage,” he said. Kington said he has written Iowa’s congressional delegation — mostly Republicans — to urge them to drop the endowment tax.

At Berea, the $1 billion endowment enables the Kentucky college to cover tuition for all of its roughly 1,600 students. More than four-fifths of Berea students have enough financial need to qualify for federal Pell grants. The college estimates it would have to pay the federal government about $1 million a year if the excise tax is approved, enough to cover tuition for about 30 students.

“The unintended consequence of some of the proposed revenue provisions, if enacted, would represent very appreciable burdens on the college and its commitment to providing a no-tuition education to students who could not otherwise afford to attend college,” Berea President Lyle Roelofs said. He has made his case against the tax to the Kentucky congressional delegation, including Senate Majority Leader Mitch McConnell (R-Ky.)

Rep. Tom Reed (R-N.Y.), a Ways and Means committee member, applauds Berea’s model. He said he would support an exception to the tax for schools that use a large percentage of endowment funds for financial aid.

“This is a start to the process,” he said Wednesday of the tax proposal. “There needs to be some accountability with where the money is going. There is a culture of excess, a culture of abuse, and we really need to put a spotlight on it. People deserve to know where the money is going. This is tax-free money we’re talking about.”

Many colleges oppose the endowment tax and other provisions in the tax bill that they say are likely to deprive colleges of revenue or drive up costs for students, including a proposal to eliminate a student loan interest deduction. The American Council on Education and 45 other education groups sent the Ways and Means Committee a letter this week expressing "grave concerns" with the bill. The committee plans to send the bill soon to the House floor.

Officials at several affected schools were reluctant to speak publicly against the endowment tax, aware that perceptions about their wealth can be a political disadvantage. Some said they are working behind the scenes to block the proposal in the GOP-led Senate.

Susan I. Fitzgerald, associate managing director at credit rating agency Moody’s Investors Service, said the proposed tax could prove painful for some schools.

“It really adds budgetary pressure to those schools that are dependent on endowment income,” she said. “If the tax were to go through, the question becomes how will those schools make up the difference. Would they raise tuition? Cut spending?”