Republicans plan to tax US college endowments: Who will that hurt?

Republicans in the United States Congress are pushing for an increase in taxes on US universities, under a new bill that narrowly passed in the House of Representatives last Thursday.

The bill’s supporters argue that a provision relating to higher educational institutions is crafted to target “woke” universities.

Universities have taken a hit from US President Donald Trump’s executive orders and decisions aimed at changing education and immigration in the country, alongside cracking down on pro-Palestine protests that took place on US college campuses last year.

The new tax plans aim to increase taxes on what US universities earn from their endowments.

So, what exactly is an endowment?

An endowment refers to funds or assets donated to a university to keep it financially sustained in the future.

Endowments typically comprise charitable donations from alumni, other donors and companies.

The bill before the US Congress sets tax rates for universities based on their effective endowments per student – by dividing their total endowments by the number of full-time students at the institution.

Earnings from investments made from endowments will be taxed, if the bill becomes law.

Have universities been taxed so far?

Most colleges have not been taxed on their endowments for centuries.

The Revenue Act of 1909 exempted educational institutions as nonprofits which operate for public interest “exclusively for religious, charitable, or educational purposes”. As a result, educational institutions did not pay taxes on their investment gains.

This changed during Trump’s first presidential term. In 2017, the US Congress passed the Tax Cuts and Jobs Act, which introduced a 1.4 percent tax on colleges with per-student endowments of at least $500,000, and at least 500 students who paid tuition. Hence, the tax applies only to some of the wealthiest institutions in the country.

This endowment tax generated approximately $380m in 2023, from 56 universities that met the taxation bar.

What do Republicans want to do now?

On May 22, the Republican-controlled House of Representatives passed, with a 215-214 vote, what Trump and the legislation’s authors have called the One Big Beautiful Bill. Within this bill is a proposal to raise taxes on elite universities.

The proposal is tiered, and aims to levy a tax of:

• 1.4 percent on investment returns of institutions that have a per-student endowment of more than $500,000 but less than $750,000.
• 7 percent on institutions that have a per-student endowment of more than $750,000 but less than $1,250,000.
• 14 percent on institutions that have a per-student endowment of more than $1,250,000 but less than $2,000,000.
• 21 percent on institutions that have a per-student endowment of more than $2,000,000.

These percentages apply to universities that had at least 500 tuition-paying students in the previous taxable year and where 50 percent of their full-time tuition paying students are in the US. Universities identified as “qualified religious institutions” are exempt from this tax.

The proposal was drafted by Republican legislators in the Ways and Means Committee, the oldest tax-writing body in the House.

“For too long, universities have received beneficial treatment from our tax code while disregarding the interest of taxpayers,” Jason Smith, Missouri Republican and chairman of the House Ways and Means Committee, said shortly after the bill passed.

A fact sheet released by Smith says the tax “holds woke, elite universities that operate more like major corporations and other tax-exempt entities accountable”.

The bill is now headed to the Senate, where Republicans hold 53 seats and Democrats hold 47. It is unclear when the vote will take place, but Trump is urging Republican senators to promptly pass it.

On May 22, Trump wrote on his Truth Social platform: “Thank you to every Republican who voted YES on this Historic Bill! Now, it’s time for our friends in the United States Senate to get to work, and send this Bill to my desk AS SOON AS POSSIBLE!”

How many colleges could be affected by this?

An investigation by The New York Times found that at least 58 schools could potentially be affected by this.

Major universities could fall under the highest tax slab.

In the 2024 fiscal year, Harvard University’s total endowment was worth approximately $53.2bn – the largest of any university. There are 24,596 students at Harvard, which means the per-student endowment is $2.16m. That means it will have to pay a 21 percent tax if the bill becomes law.

Yale University’s endowment is valued at $41bn and the university has 15,490 students, bringing the per-student endowment to about $2.7m. While the institute currently pays the 1.4 percent tax, it too will have to pay a 21 percent tax if the bill becomes law.

Likewise, Stanford’s endowment is $36.5bn and it has 17,529 students, making the per-student endowment about $2.1m. While the institute currently pays the 1.4 percent tax, it will have to pay a 21 percent tax if the bill becomes law.

By contrast, University of Pennsylvania’s total endowment was $22.3bn as of June 2024 and the institute has 24,219 full-time students, making the per-student endowment $920,764. While the institute currently pays the 1.4 percent tax, it will have to pay a 7 percent tax if the bill becomes law.

But because the bill determines which universities are taxable based on per-student endowments, it isn’t just big schools that will be affected: Even smaller private institutions, that previously paid 1.4 percent tax, might now have to pay much more.

Pomona College in Claremont, California, had a total endowment of $3bn in 2024, of which the institute uses 5 percent each year.

The university says 60 percent, or $36m, of financial aid at Pomona is covered by endowment, which also covers about half the institute’s operating budget. It has 1,747 students, which means Pomona has a per-student endowment of $1.7m. Until now, it paid a tax worth 1.4 percent of the endowment; if the bill passes, it will be taxed at 14 percent.

Can this be enforced?

If the bill passes in the Senate, Trump is almost certain to sign it.

But the version of the legislature that makes it out of Congress might be different from the one passed by the House.

“Even if the Senate passes the tax, it’s possible that they change the amount of the tax and the criteria for its application in the process,” said Emily Saulnier, editor-in-chief of the Boston College Law Review, a publication at Boston College Law School.

Centrist and conservative Republicans in the Senate are divided on the bill. House Speaker Mike Johnson has urged Republican senators to revise it as little as possible. If Senators pass a revised version, the House will need to vote on that new text for it to be passed onto Trump, who will then sign it into law.

Wisconsin Republican Senator Ron Johnson has opposed the bill in its current form, arguing it will increase the national deficit, which is the difference between the amount of money the federal government spends and the amount it earns through revenue. Johnson said the House bill would add “$4 trillion” to the deficit. In 2024, the deficit was $1.83 trillion.

Republican Kentucky Senator Rand Paul raised similar concerns during a Fox News interview on May 25, saying while he supports parts of the bill, it would “explode the debt”.

But if the bill does pass and is signed by Trump, “it will apply to all colleges and universities” that meet the conditions set in the legislation, Saulnier said.

How have universities reacted?

“This legislation presents a greater threat to Yale than any other bill in memory,” Yale President Maurie McInnis said in a statement released on May 22.

“The endowment tax places more financial burden on students by making college less affordable. Taxing schools reduces the revenue available for financial aid,” she wrote, adding that “the endowment tax will undermine the country’s global leadership in technology.”

During a faculty meeting in 2024, Harvard President Alan M Garber called a raise in endowment taxes “the threat that keeps me up at night”.

How did we get here?

The Trump administration has repeatedly attacked higher education institutions, alleging they fail to curb anti-Semitism, or for “illegal and immoral discrimination” in the form of diversity, equality and inclusion (DEI) programmes.

Last year, pro-Palestine protests and encampments sprang up in several US universities, including Columbia, Yale, New York University (NYU) and Harvard.

On January 29, Trump signed an executive order titled “Additional Measures to Combat Anti-Semitism”, ordering executive department heads to submit a report on all criminal and civil authorities and actions available for fighting anti-Semitism.

A day after he signed this order, Trump was quoted in a White House fact sheet, saying: “To all the resident aliens who joined in the pro-jihadist protests, we put you on notice: come 2025, we will find you, and we will deport you. I will also quickly cancel the student visas of all Hamas sympathizers on college campuses, which have been infested with radicalism like never before.”

Trump has since frozen federal funding to several universities, including Columbia and Harvard.

With that funding at risk, universities are even more reliant on their endowment funds to sustain the research they conduct.

However, endowments are subject to restrictions and donors decide how most of the endowment is spent. In Harvard’s case, donors decide where 70 percent of the annual endowment distribution is spent.

On May 22, the Trump administration revoked Harvard’s certification to enrol any new foreign students. This move has been temporarily blocked by a federal judge.

On Tuesday, the government ordered US embassies abroad to stop scheduling new visa interview appointments for foreign students and exchange visitors, according to an internal cable seen by news agencies.