In a new policy brief, Arnold Ventures Tax and Fiscal Policy Fellow Scott Hodge outlines how expanding the current tax on large university endowments is an important step toward restoring fairness and fiscal responsibility in the tax code.
Despite their charitable missions, college and university endowments — now totaling $871 billion across 654 U.S. institutions — operate much like tax-exempt hedge funds, reaping large, untaxed returns while tuition costs have continued to rise.
Even as endowments have grown by more than 70 percent in recent years, the typical private university still spends a small fraction of its endowment annually on operations and student support. There is a sizeable gap between what universities earn on their endowments and how much actually supports students.
Meanwhile, many universities continue to use municipal bonds for capital improvement, borrowing at interest rates less than 5 percent while their endowments continue to accumulate value. This cheap form of borrowing does not improve educational quality and, in fact, independent research has found that the increased reliance on debt has contributed to the rising cost of higher education.
The 2017 Tax Cuts and Jobs Act (TCJA) imposed a modest 1.4 percent excise tax on certain large private university endowments, but proposals are now under consideration to significantly raise that rate. Such reforms would promote parity in how investment income is treated and strengthen the tax base without increasing taxes on working Americans.
This is one of the 20 policy recommendations we have outlined to help Congress permanently extend the TCJA while generating up to $4 trillion in savings.
