Republican Party Proposes 14% to 21% Tax on University Endowment Funds

The escalating conflict between Donald Trump and the Ivy League universities has led the Republican Party to consider significant adjustments to the tax rates on university endowment funds. The proposed changes aim to increase the tax rate on university endowment investment income from the current 1.4% to a range of 14% to 21%, depending on the size of the endowment.

In a letter sent on Monday, the Trump administration highlighted Harvard University's 53 billion endowment fund, emphasizing its "essentially tax-free" status. Trump has previously criticized these institutions for indoctrinating students with "radical left-wing" ideologies and has proposed revoking their tax-exempt status. The Republican Party believes that increasing the tax rate will ensure that universities allocate more funds to student needs rather than to initiatives such as Diversity, Equity, and Inclusion (DEI) programs or legal challenges to Trump's policies. Raising the tax rate to 14% is estimated to generate 1 billion in federal revenue over a decade.

Top-tier universities in the United States are facing multiple challenges. The delay in investment returns, due to private equity firms taking the longest time in over a decade to return funds to investors, has put significant liquidity pressure on endowment funds. Harvard University, which has allocated nearly 40% of its 53 billion endowment to private equity, is currently in deep negotiations to sell approximately 1 billion in private equity fund shares.

High taxation could severely impact university finances and scholarship programs. Universities rely on their endowment funds as a stable financial backbone, typically withdrawing around 5% of the returns for scholarships and other operational costs. Critics argue that these institutions, which charge students up to 95,000 annually in tuition fees, are allowed to accumulate massive tax-free earnings.

Until Trump's 2017 tax reform, university endowment funds were not subject to taxation. The initial tax rate set at 1.4% applied to schools with at least 500 students and 500,000 in reserves per student. In 2023 alone, this tax generated 380 million from 56 universities. In January of this year, the House Ways and Means Committee proposed increasing the tax rate to 14%, and lawmakers are now considering various options, including a 21% rate. Senator and current Vice President Mike Pence has even suggested raising the tax rate to 35%.

For smaller institutions like Davidson College, even the most modest proposal would increase its annual tax bill from approximately 1 million to 11 million. College President Douglas Hicks stated that this amount would be astronomical for their budget, equivalent to canceling full scholarships for up to 200 students. Middlebury College in Vermont, with around 3,000 students, has also cited increased taxation as a factor contributing to recent financial uncertainty. The college is facing a budget deficit due to a decline in graduate enrollment but has chosen not to withdraw more funds from its endowment out of concern for potential tax increases. The school's leadership noted in an April update that the proposed increase in endowment taxes could raise their tax bill from 1 million to 12 million.

Investors should closely monitor the development of this tax policy, as it not only affects the future of university endowment funds but may also signal a broader shift in tax policies during a potential Trump presidency.