With a war on Harvard raging, religious colleges get big tax break in Trump spending bill

USA Today

29-05-2025

With a war on Harvard raging, religious colleges get big tax break in Trump spending bill Trump's spending bill, headed to the Senate, would exempt religious colleges from a big tax increase on endowments. But some religious institutions may not qualify, raising First Amendment concerns.
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As the Trump administration ramps up its war against Harvard University and other institutions seen by critics as woke, it is carving out major exceptions for religious institutions – including from a massive tax increase on college endowments.
But the new tax provisions in Trump's spending bill – dubbed the 'The One, Big, Beautiful Bill' that is now in the Senate's hands – don't apply to all religious colleges and universities, raising First Amendment questions and increasing the likelihood of legal challenges, experts say.
The tax hike on endowment returns could cost some elite colleges hundreds of millions of dollars. But the tax threatens to envelop more than the latest targets of the president's ire. Some Christian schools favored by conservatives could face the increase and are raising concerns about the bill, despite the carveout for religious institutions.
The bill could, for example, touch Hillsdale College in Michigan, a private school with a Christian emphasis that has long refused federal funding to maintain autonomy from national regulations.
It could also hit DePauw University, an Indiana institution founded by Methodists in 1837. In 2024, the school received multiple gifts worth $200 million, a huge sum which helps the school provide financial aid to its neediest students.
Though the school still has ties to the Methodist church, its senior leadership questions if it will be able to avoid the tax increase. It's not paying the current endowment tax, but Andrea Young, the college's vice president for finance, said the proposed tax increase could cost between $2 million to $5 million a year.
The university's endowment is currently at about $917 million, a large figure but far below the multi-billion amount common among top colleges. While they wait on the legislation, DePauw staff have been communicating with lawmakers about the potential impact.
'A tax to the endowment directly impacts the amount of financial aid we're able to give to students,' Young said. 'Instead of increasing access, we actually have the potential to decrease access for students with need.'
Endowment tax structure 'extremely novel' for higher education
Congress passed the current 1.4% tax rate in 2017. It applies to schools with more than 500 students and with an endowment per student greater than $500,000. The new bill adds multiple tiers of taxation up to 21% on institutions with a student adjusted endowment greater than $2 million. International students are excluded from that per student figure, which likely means more institutions will face the tax.
While tiered tax systems are already used for calculations such as income tax, a similar structure would be 'extremely novel' for higher education, said Phillip Levine, an economic professor at Wellesley College in Massachusetts.
Notably, the proposed tax includes an exemption for schools that are a 'qualified religious institution.'
The legislation defines that as an institution established after July 4, 1776 by or through a religious organization, has maintained that affiliation and has an institutional mission that 'includes, refers to, or is predicated upon religious tenets, beliefs or teachings.'
Those details suggest the exemptions are 'clearly instituted for political reasons, not economic reasons,' Levine said.
Indeed, House Republicans have touted the endowment tax as a way to hold the nation's top-tier universities accountable for policies they disagree with.
The House Ways and Means Committee wrote in a statement that the tax 'holds woke, elite universities that operate more like major corporations and other tax-exempt entities accountable, ensuring they can no longer abuse generous benefits provided through the tax code.'
Only a handful of schools in the country predate the American Revolution, but they include institutions like Harvard, Columbia and Yale. Harvard, for example, was founded by Puritans in 1636 and continues to operate a divinity school. Its endowment sits at more than $50 billion – the largest in the world, according to the New York Times.
Many religious schools established after the nation's founding maintain ties to denominations. But not all do, raising questions about which religious institutions could be exempt.
For instance, Earlham College in Indiana, which was founded by Quakers in 1847, maintains an affiliation with the Western Yearly Meeting of Friends. But in 2010, the college moved away from a legal partnership with the Indiana Yearly Meeting.
Then there are schools like Berry College in Georgia, founded in 1902 on a 'commitment to be forever Christian in Spirit' but which has never had a 'denominational statement of faith.'
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Hillsdale College is likely facing similar uncertainty with the tax. Freewill Baptists started the school in 1844 as a non-denominational institution.
The college declined to say if it believed it qualified for the exemption, but its president, Larry Arnn, has written an opinion column arguing against the endowment tax. It also hired lobbyists to address threats tied to it, Politico reported.
In his column, Arnn does not address the question of religion. But he described the tax as an incursion into Hillsdale's autonomy that would affect its ability to offer financial aid.
'It would force us to cut resources, to limit opportunities, to pass burdens onto students and their families — all in the name of a fairness that is not fair,' Arnn wrote.
Others share Arnn's skepticism.
The Council for Christian Colleges & Universities, an organization with more than 150 member institutions in the U.S. and Canada, said it had 'serious concerns about the endowment tax in principle.'
But it welcomed the break for religious schools. The organization hopes the exemption will be applied to institutions without a continuous affiliation to a specific denomination.
'Many schools operate with a clear and consistent religious identity while remaining independent of formal denominational structures,' spokesperson Amanda Staggenborg said.
'These institutions are no less committed to their faith-based missions and no less deserving of protection.'
USA TODAY reached out to the White House for comment.
Could the tax lead to more litigation?
The proposed tax structure 'amounts to a kind of gerrymander' that would violate the First Amendment if enacted, according to Daniel Conkle, a professor emeritus at Indiana University's Maurer School of Law.
Allowing an exemption for religious schools favors the religious over the secular, he said, and limiting the exemption to only those institutions established after 1776 disfavors religious organizations with longer histories.
Conkle noted the U.S. Supreme Court's 1982 ruling in Larson v. Valente, a case over a Minnesota statute that created different reporting requirements for religious organizations depending on how many of their contributions came from their own members.
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In writing for the majority, Justice William Brennan said the 'clearest command of the Establishment Clause is that one religious denomination cannot be officially preferred over another.'
In order for the endowment tax to be constitutional, Conkle said there would have to be a content-neutral justification for the structure that shows it is neither targeting universities for perceived 'wokeness,' a violation of free speech, or discriminating among religions in violation of the establishment clause.
He said the massive financial implications of the proposed tax structure mean there's 'no doubt that there's going to be litigation' if it's passed into law, Conkle said.
Why not draw down the endowment?
Endowments generally come from private donors and are often made up of donations that have been accumulated over years. An endowed gift is meant to support the college or university long term and may come with donor restrictions on how it's spent.
Critics of large university endowments often question why the schools continue to receive taxpayer funding when they seemingly have a huge pot of money to draw from.
Broadly, universities are not pulling money directly from their endowment to fund financial aid. Rather, they invest those funds and then use those returns to provide scholarships. The idea of the endowment, Young said, is that it offers support not just for the current class of students but all those that are to come.
Drawing down the endowment, Young said, limits that ability. What's more, for endowments to remain effective they must grow to meet the demands of the economy. A shrinking endowment, Young said, can't do that. At the same time, universities generally must raise tuition to keep up with the cost of inflation.
'We also increase the amount of aid we give every year due to inflation,' Young said. 'As our endowment is subject to taxes that diminishes our ability. It's a vicious circle.'
A better way to tax college endowments?
The college endowment tax is also seeing pushback from unexpected sources.
Neal McCluskey at the libertarian-leaning CATO Institute wrote the tax system should not be used to punish political enemies, but that clearly was the goal with the Republicans plan. He said endowments come from donors who give their money willingly, a model he argued the government should reward.
'If people want to give their own money to 'woke, elite universities,' who is the government to judge? Instead, it should worry about its own, forced funding of higher ed,' he wrote.
James Murphy, the director of postsecondary policy at the advocacy group Education Reform Now, also questioned the motivation behind the tax and said the first version of the endowment tax failed to reduce the cost of education.
It's unrealistic, he added, to expect the universities to simply enroll more students to drop below the $500,000 per student figure. For example, it would require Harvard to add 80,000 more students, he wrote in a recent column.
'An endowment tax isn't necessarily a terrible idea, but this version of it is a terrible idea to be sure,' he said.
Others think university endowments should be taxed but with specific goals in mind.
Massachusetts state Rep. Simon Cataldo, a Democrat, introduced a version of an endowment tax − he calls it a public service fee − in January 2023 in anticipation of the U.S. Supreme Court's ruling on affirmative action.
His legislation targets institutions that use what he described as unfair admission practices, like giving an advantage to legacy students. In his model, Harvard would be taxed, but institutions like the Massachusetts Institute of Technology would not. His rate is also much lower. At the highest rate universities would pay 0.2% of their endowment. That rate is also based on the endowment rate per student.
In addition, Cataldo said his proposal, which is still being considered by the state legislature, would redirect money to public colleges.
'Shame on the Democrats for not identifying this issue as something that was important and something that resonates with the general population,' Cataldo said. 'This bill is far more carefully crafted to address practices that are actually harmful, and, also, importantly gives schools the option to do the right thing.'
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